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(Reuters) – Four months before the second-largest bank failure in U.S. history, key banking regulators worried about the dangers large regional lenders posed to financial stability, according to records from an advisory meeting reviewed by Reuters.
Officials from the Federal Deposit Insurance Corporation (FDIC) told an advisory panel on bank failures in November that “large portions” of regional banks’ deposit balances were uninsured and warned of “knock-on effects” for other banks.
FDIC chairman Martin Gruenberg said at the meeting, which was held in public but the details of which have not been previously reported, that after the financial crisis of 2008 regulators had fixated on making the biggest banks, deemed global systemically important banks (G-SIBs), safe.
Officials had yet to do the same for regional banks, some of which had grown to considerable size and complexity, said Gruenberg.
“We woke up and realized the failure of one of these large banking institutions could really be an enormous challenge with financial stability implications,” Gruenberg said at the November meeting.
The panel, called Systemic Resolution Advisory Committee (SRAC), comprises marquee names from the world of banking, law, finance and economics, including top former regulators and sitting executives.
One member, Timothy Mayopoulos, who within months would quickly be named chief executive of Silicon Valley Bank after it failed in March, queried regulators about dealing with regional banks’ high proportion of uninsured deposits.
The FDIC did not respond Thursday to requests for comment about the meeting.
Banking regulators have come under criticism since March for failing to stave off the crisis triggered by a run on Silicon Valley Bank, most of whose deposit base was uninsured. The Fed and FDIC are expected to release reports on Friday on their supervision of Silicon Valley and Signature Bank (OTC:SBNY).
The November meeting shows, however, that FDIC officials were acutely aware of challenges they could face in handling regional bank failures but key issues remained unresolved ahead of March’s failures.
The month before the meeting, the Fed and FDIC called for advance public comment on a future proposal that would extend to large regional banks some of the same safeguards now required of globally systemic banks.
The meeting was the first since the creation of the panel more than a decade ago to consider policy responses to failures in the middle-tier of large financial institutions.
Margaret Tahyar, a member of the advisory committee and co-head of financial institutions at the law firm Davis Polk & Wardwell, told Reuters that, because each banking crisis is different, resolution planning would always have to contend with unanswered questions.
“The FDIC’s focus on large regionals at the last SRAC now looks prescient in hindsight,” she said.
