Back
10
 min read

One Year After Banking Crisis, Federal Reserve Considers New Regulations

By 
By 
Taylor Hourigan
No items found.
  |  Updated on 
  |  Updated on 
March 18, 2024

Federal Budget

Ambassador writing program

The Summary

One year after the 2023 U.S. banking crisis, where three mid-sized banks failed and were seized by federal regulators, the Federal Reserve and other regulatory agencies are preparing to unveil new mandates.

One year after the 2023 U.S. banking crisis, where three mid-sized banks failed and were seized by federal regulators, the Federal Reserve and other regulatory agencies are preparing to unveil new mandates.

Why does this matter?

As a result of the crisis, which involved Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank, the total money supply in America dropped $22.5 billion dollars, the largest drop on record since the Great Depression. In 2024, U.S. banks are still operating cautiously, with The Wall Street Journal reporting that commercial banks are sitting on roughly 15% liquid assets. This is up notably from the 10% reported at the end of 2019.

To remain viable, banks must make sure they have enough liquid assets to cover withdrawals from customers and withstand stress factors, such as rising interest rates. Notably, the Federal Reserve raised interest rates in 2022, which negatively impacted SVB’s investments in low interest bonds. This was one of the biggest contributors to SVB’s failure.

What is the Fed proposing? 

According to sources familiar with ongoing conversations, the Federal Reserve first may require banks to be prepared to borrow from the ‘discount window’ in cases of emergency. The discount window is a program by which banks can borrow money from the Federal Reserve in the short term by leveraging collateral, or valuable assets. While SVB tried to access the discount window in its final hours, it was not familiar with how to do so, and did not have the proper documentation to qualify in a timely manner.

Banks may also be required to hold an additional 20% in liquid capital (ready-to-spend money) based on bank size. Banks are currently required to hold at least 4.5% in capital to absorb potential losses. Banking industry representatives argue that this increase in capital requirements could cause more banks to merge to stay competitive, and may hike loan rates for potential borrowers.

Diving deeper: What did we learn from this?

In an event hosted on March 5, 2024 the Brookings Institution invited leaders from Washington and the banking industry to reflect on lessons learned from the 2023 banking crisis. Here are our top three takeaways from the event.

1. Regulatory bodies did not effectively use the authority given to them.

Panelist Tobias Adrian, Director of the Monetary and Capital Markets Department of the International Monetary Fund, suggested that federal regulators and supervisors were partially to blame for the crisis. 

“The red flags were clearly there,” Adrian said, “but what [supervisors] did not do is use their powers to get a commitment from management to remedy those issues.” 

Supervisors had filed 31 citations against SVB in the years leading up to its collapse. However, no regulatory action was taken against the bank after it failed to rectify these issues. “The issues were there, and management basically ignored those letters,” Adrian said.

After the 2008 financial crisis, federal bank supervision underwent massive restructuring. In the largest change, supervisors were required to perform yearly ‘stress tests,’ or simulations of how banks would fare in different possible financial situations. While this requirement was strictly enforced against large banks such as JPMorgan Chase and Citibank, Adrian pointed out that smaller regional banks such as SVB and Signature did not face the same level of scrutiny. 

For their part, it seems the Federal Reserve agrees with Adrian’s assessment. “Regulatory standards for SVB were too low [and] the supervision of SVB did not work with sufficient force and urgency,” wrote Fed Supervisory Vice Chair Michael Barr in an April 2023 postmortem report.

2. Banks do not want to use or don’t know how to use the discount window.

The discount window allows banks to borrow from the Federal Reserve in times of crisis. SVB turned to the discount window when it was already deep in crisis, but was unprepared to actually receive emergency funding. Signature Bank, on the other hand, didn’t even consider the discount window as an option. 

“Banks are reluctant to use the window when they initially have a liquidity [problem] that’s unexpected” because of the stigma associated with accessing emergency funds, said panelist Susan McLaughlin, Executive Fellow at the Yale Program on Financial Stability.

What causes this stigma? Bill Demchak, CEO of PNC Bank, gave his insight: “It’s the lender of last resort… The day you hit it for anything other than a test, you effectively have told the world you’ve failed.”

McLaughlin suggested a couple steps that could be taken to reduce stigma surrounding the discount window: 

  • The Federal Reserve could create a clear, long-term communication plan expressing to the public that discount window borrowing is a legitimate way for banks to get extra funding when needed. 
  • The Federal Reserve could improve its infrastructure to make it easier for banks to pledge collateral when applying to borrow. Demchak noted that the pledging process is mechanically difficult, saying: “You call your regional Fed, someone answers the phone–maybe–then they’ll have a meeting to see if it’s actually okay for you to draw.” 

While discount window borrowing likely would not have saved the banks that went under, McLaughlin theorized that it could have slowed down panicked customer withdrawals and mitigated the impact on other banks. Should the aforementioned policy changes become law, banks would be required to have discount window borrowing as part of their contingency plan, and be ready to borrow should an emergency occur.

3. The banking system is behind the times on technology. 

When asked what steps the Federal Reserve should take to prevent another crisis, U.S. Rep. Patrick McHenry (R-NC), chair of the House Financial Services committee, pointed to technology. “On the front side of this, you have a fast bank run, which is based on consumer tech [social media], and on the back end, the banks are [operating]… the way they did in the 1940s,” McHenry pointed out. 

McLaughlin agreed and supported automating aspects of using the discount window. “Why not automate the check…and make it more of a straight-through [sic] process?” McHenry expressed similar thoughts. “This should be a push of a button rather than a phone call,” he said

Regardless of suggested solutions, all the event’s panelists seemed to agree on one point: bank failures are inevitable. But, according to Gary Cohn, Vice chairman of IBM, there are ways for us to better predict failures and contain the damage done to other banking institutions. 

“We have technology today that could help us,” Cohn said. “There are tools today…that look at the way people inside institutions react to certain things. Why don’t we try something really revolutionary and try to monitor bad behavior and catch things before they happen?” 

Looking ahead 

Rep. McHenry signaled that there was bipartisan support in the House to pass regulation reforms, though he did voice concern that “the Fed is already way too involved in the [banking] market at the moment.” He said he wants to make sure Congress knows all the facts about the crisis and its components before taking action. 

Currently, U.S. banks seem to be on sound footing, but global economic growth has been particularly slow in the early months of the year. The U.S. economy is only expected to experience a “tepid” growth of 1.4% throughout 2024. In the context of such challenges, readers should keep an eye on whether new risks emerge as banks look to adapt to this situation.

For more on the banking crisis, check out Georgetown University Ambassador Emily Hahn’s article.

GALLERY
No items found.
Q:
A:
Keep Exploring

POLICY

Federal Budget

Care about public policy? You need to understand where the federal government gets - and how it spends - money.

Read More

POLICY

Social Security

More than 65 million Americans rely on Social Security for retirement income, survivors benefits, and disability insurance payments. Learn more about how the program works, its funding challenges, and the proposals to address them.

Read More

Leadership

Leadership Programs

Our programs and events help you stay informed and get involved. Want to learn more about issues like Medicare, student loans, and Social Security? Check out our leadership and events section.

Read More

Policy

Policy Library

Learn more about our country's biggest challenges.

Read More
ARTICLES

Ambassador writing program

Federal Budget

7/16/21

What You Need To Know About the Latest Economic Projections from the CBO

Ambassador writing program

Federal Budget

11/3/23

Does the National Debt Matter?

Ambassador writing program

Federal Budget

12/19/24

DOGE Wants to Cut $2 Trillion off the Federal Budget. But How?

Ambassador writing program

Federal Budget

11/3/23

What Are the Different Types of Federal Debt?

The federal budget is the itemized plan for public expenditures of the federal government. This includes mandatory and discretionary spending. The budget is compiled annually and is named after the proceeding fiscal year, which runs from Oct. 1 to Sept. 30. If a budget is not agreed upon by the start of the fiscal year, a government shutdown will be triggered unless Congress passes a continuing resoultion, which provides funding at existing levels for a period of time to allow for negotiations to continue.
Federal Budget
This ratio compares the federal government debt of a country to the country's gross domestic product (GDP), in other words, what it owes to what it produces. Expressed as a percentage, the higher the debt-to-GDP ratio of a country the more likely it is that a country will face economic challenges due to its debt.
Debt-to-GDP Ratio
The federal debt is the cumulative amount the federal government owes to bondholders, both foreign and domestic. This represents the total, historical difference between federal spending and revenue.
National Debt
The federal budget deficit is the annual difference between the federal government’s revenue and how much it spends.
Budget Deficit
GDP is the total monetary value of consumer goods and services within a country's economy. This calculation considers consumer spending, government spending, private domestic investment, and a country's imports and exports.
Gross Domestic Product (GDP)
The U.S. federal government's sole source of income is tax revenue, which is primarily composed of individual income taxes, corporate income taxes, and payroll taxes. Other sources of tax revenue include excise taxes and estate taxes.
Tax Revenue
These bills provide and place limits on an agency's budget authority, the ability to spend government funds. There are 12 annual appropriations bills and occasional supplementary appropriations bills that obligate federal funds for specific purposes.
Appropriations Bills
Authorizing legislation is a prerequisite for Congress to appropriate budget authority, or the ability to spend government funds for various programs. Authorization laws also act as guidance on the appropriate level of funding to be set aside for specific programs. This might be in setting a limit, or it may simply authorize “such sums as may be necessary.”
Budget Authorizations
A congressional budget resolution establishes topline spending and deficit limits for the following fiscal year. Although not law, because it's not signed by the president, budget resolutions are enforceale using the rules of either chamber. By law, a budget resolution is to pass the House and Senate by April 15 of each year, which rarely happens.
Budget Resolution
The president's budget request kicks off the annual budget process and provides a breakdown of how the president would like Congress to enact tax and spending laws. This request is due on the first Monday in Feburary but is normally provided late.
Budget Request
Discretionary spending is the portion of the federal budget that Congress debates every year. There are 12 components of discretionary spending, and these are usually broken down into defense and non-defense spending.
Discretionary Spending
The programs that Congress is required to fund make up mandatory spending. This includes programs like Social Security, Medicare, and interest payments on the debt.
Mandatory Spending
What you pay for your own medical care.
Out-of-pocket Payments
Within the context of the Hospital Insurance (HI) Trust Fund, insolvency means that Medicare is unable to cover the full cost of Part A (hospital care) benefits.
HI Trust Fund Involvency
Chronic conditions are diseases and conditions that usually last for 3 months or longer, such as diabetes, heart disease, hypertension, and cancer.
Chronic Diseases
The percentage of the costs of a healthcare service that you pay (e.g., 20%). Coinsurance kicks in after you've paid your deductible.
Coinsurance
The amount you pay for healthcare services before your insurance begins to cover expenses.
Deductibles
Examples include disabilities that qualify the individual for Social Security Disability Insurance (SSDI) benefits (i.e., unable to engage in “substantial gainful activity” because of a medically-determined physical or mental impairment expected to last at least 12 months or until death), end-stage renal disease (ESRD), and amyotrophic lateral sclerosis (ALS).
Long-term Disabilities
For every current recipient of Social Security, there are several active workers whose taxes are transferred directly to retirees. When Social Security began, there were dozens of workers per every recipient. That number has shrunk to just under three workers for every active Social Security recipient.
Worker-to-Beneficiary Ratio
As a covered worker, you pay Social Security taxes up to the taxable maximum. In 2024, that amount is $168,600. Since Social Security was never meant to function as a retirement program, wages subject to taxation were capped so that high-income individuals did not end up with Social Security payments many times what would be necessary to prevent poverty in old age.
Taxable Maximum
As the spouse of a Social Security recipient, you are entitled to additional benefits of up to one-half of their full benefits. You do not have to have a work history to receive this payment. If you have worked and are owed Social Security benefits, you get the maximum of what you are owed or your calculated spousal benefit.
Spousal Benefit
All funds in the OASDI trust funds are invested in "special issue securities" specifically created for Social Security. In effect, they are IOUs that the government pays to itself.
Special Issue Securities
In the context of Social Security, the "replacement rate" or "replacement ratio" is the percent of pre-retirement earnings that Social Security recipients can expect to receive. Median-income retirees typically expect around a mid-thirty percent replacement rate, low-income retirees get closer to fifty percent, and high-income retirees typically receive a mid-twenty percent replacement rate.
Replacement Rate
Every covered worker pays a payroll tax that includes a combined 12.4% up to the taxable maximum.
Payroll Tax
The primary insurance amount is the sum of three separate percentages of the AIME. It is the initial benefit a retiree receives, and it increases with any future COLA.
PIA
The Old Age and Survivors Insurance Trust Fund is what most people picture when they hear "Social Security." This trust fund pays benefits to retired workers and their spouses and dependents. It also pays benefits to the survivors of deceased retirees.
OASI
OASDI stands for Old Age, Survivors, and Disability Insurance. It encompasses both the retirement portion of Social Security (OASI) and the disability insurance program (DI).
OASDI
The full retirement age began at 65 but is slowly increasing to the final age of 67 for those born in 1960 or later.
Full Retirement Age
Employers whose workers pay into Social Security also contribute 6.2% of each worker's payroll taxes. While it may seem like employers pay for half of all benefits, economists typically assume that any taxes paid by employers are in effect paid by employees, since in absence of the mandatory taxes, the employees would have higher wages by roughly the same amount.
Employer Contribution
Every covered worker contributes 6.2% of their paycheck in OASDI payroll taxes, which constitutes the "employee contribution" toward Social Security.
Employee Contribution
Future Social Security recipients can elect to retire early at 62 and receive reduced benefit payments. For more, click here.
Early Retirement Age
DI stands for Disability Insurance. While most people associate Social Security with retirement, it also technically encompasses disability insurance payments to almost nine million Americans.
DI
The total amount of any employee's pay that is taxed by Social Security payroll taxes. All wages below the taxable maximum are covered earnings. About 94% of workers fall under the taxable maximum every year.
Covered Earnings
The cost of living adjustment (COLA) is an annual adjustment for Social Security benefits designed to prevent losses in beneficiaries' purchasing power due to inflation.
COLA
Social Security recipients are not limited to retirees. In the OASI system, spouses are entitled to a spousal benefit, as are dependents of beneficiaries who are under the age of 19.
Beneficiary
Stands for average indexed monthly earnings. When a worker retires, the Social Security Administration summarizes up to 35 years of the worker's lifetime earnings and adjusts them for wage inflation. This number is then used to calculate the retiree's "PIA" or primary insurance amount.
AIME