Brookings Institute Releases Article on Bank Oversight After Recent Volatility

After the collapse of Silicon Valley Bank and Signature Bank, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Treasury Department took “extraordinary measures” to prevent sector volatility from spreading any further. The Brookings article, “Rethinking bank oversight in the wake of recent banking turmoil” notes that societal changes have changed the pace (such as the impact of social media and instant news) of banking and the regulatory framework has not kept up. Additionally, the authors’ note, “the fact that ‘market discipline’ seemingly imposed by uninsured depositors can be so destabilizing to the banking system as a whole that it will be impossible to run the experiment of not protecting them, at any bank of any size, in the future.” The article highlights four recommendations federal regulators should consider in order to keep up with the evolving banking sector:

  • A centralized and automated real-time financial monitoring system (RFMS);
  • The development of a robust, automated early warning system to help regulators identify and flag banking institutions with a significant risk profile;
  • Allowing for supervisory interventions including informal and formal enforcement actions to ultimately closing the institution if supervisors find unsatisfactory results after investigating early warnings; and,
  • A real-time regulatory framework that features a coordinated response among different regulators.

The authors’ note that while their recommendations would help in the more traditional banking sector, they unfortunately do not touch on “shadow banks” which “continue to operate outside the regulatory purview, despite their growing risks to the financial system.”

Click here to read the Brookings article on bank oversight after recent banking turmoil.