In the last week, we’ve seen three major banks shut down due to a run on these banks. Silicon Valley Bank (SVB), Signature Bank, and Silvergate Capital all collapsed starting March 10th 2023 when depositors made more withdrawals than these banks could manage, making these banks illiquid.
Since then the Federal Reserve Board (The Fed), The US Treasury, and the Federal Deposit Insurance Corporation (FDIC) has promised that the depositors will be made whole and no losses will be borne by the taxpayers.
You can track all updates related to each of these banks on Compliance.ai through the following SVB, Signature, Silvergate – News and Regulatory Updates alert.
While the banking regulators have stepped in to allay fears of a larger collapse of the financial system, depository institutions would need to test the strength of their reserves and compliance of reserve requirements under Regulation D (12 CFR 204).
Regulation D is a set of Federal Reserve regulations that mandates depository institutions to hold a certain amount of funds in reserve to meet depositors’ demands for withdrawals, and is a key set of regulations to help mitigate effects of large withdrawals during a bank run. This should not be confused with Regulation D of the SEC regulations, which deals with exemptions from registration requirements for certain types of securities.
You can access Regulation D under the CFR and key regulatory updates on Compliance.ai through the following links:
- Regulation D (12 CFR 204)
- Regulation D – All Regulatory Updates Alert
Along with complying with federal regulations, banks are also subject to examination and supervision by financial regulators like the Fed and the FDIC for capital adequacy and liquidity risk management.
As part of its supervisory and regulatory duties, the Fed is responsible for—among other things—promoting the safety and soundness of financial institutions, and developing supervisory regulations, policies, and guidance. It does this through its rulemaking activity and providing guidance through its supervision and regulation letters (SR Letters). While SR letters cover all topics of the financial system, the Fed provides key guidance on liquidity risk management and capital adequacy, which are relevant concepts for financial institutions seeking to ensure adequate compliance and preparation for a run on the banks.
The FDIC in distinction provides deposit insurance protection to depositors so in the event a covered bank fails, its account holders will not lose their deposits. The FDIC, just like the Fed, is also responsible for maintaining stability and public confidence in the nation’s financial system by providing insurance protection and promoting safe and sound banking practices. The FDIC does so by conducting regular supervision and examination activities, which are designed to assess a bank’s financial condition, management practices, and regulatory compliance.
The Risk Management Manual of Examination Policies for Liquidity and Funds Management published by the FDIC states that “to efficiently support daily operations and provide for contingent liquidity demands, banks must:
- Establish an appropriate liquidity risk management program,
- Ensure adequate resources are available to fund ongoing liquidity needs,
- Establish a funding structure commensurate with risks,
- Evaluate exposures to contingent liquidity events, and
- Ensure sufficient resources are available to meet contingent liquidity needs”
Banks seeking to prepare for bank runs would benefit from setting up a robust liquidity risk management program that can handle liquidity testing events and incorporate stress tests to ensure adequacy. The FDIC publishes an array of guidance and regulations to address liquidity risks and capital adequacy and would be a key addition to a bank’s compliance program in preparation for adverse events like a bank run.
You can review the rulemaking activity and guidance letters from the Fed and FDIC with regard to liquidity risk management and capital adequacy on Compliance.ai through the Fed & FDIC – Regulations and Guidance – Liquidity Risk and Capital Adequacy alert.
In addition to the alerts mentioned above you can use the Liquidity and Capital Stress Testing – All Jurisdictions alert to track all regulatory updates related to stress testing of liquidity risks and capital adequacy in other jurisdictions. If you’d like further granularity or a broader search on any of the above areas you can review documents from Compliance.ai’s Concepts filter for Liquidity Requirements, Capital Requirements, and Stress Testing.
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