Davis Polk partner and Financial Institutions head Margaret Tahyar discussed with IFLR potential bank regulatory reforms and enhanced supervision following the recent bank crisis.

When asked about prudential standards – regulations that require banks to control risk – Margaret explained, “the paradigm shift that was put in place with Dodd Frank is that as banks get bigger and bigger, they need to be subject to higher regulatory requirements. Then in 2018 we got a few tweaks, some of which need to be revisited.”

In terms of the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, which has been blamed in part for the recent bank failures because it raised the asset threshold at which a bank is regulated as a systemically important financial institution, Margaret said, “A common misconception is that the fix is an on/off switch for the 2018 tailoring rule, as sort of ‘that was bad, turn it off’, but it’s more complicated than that. Many of the regulations that applied to the banks that failed, were in fact, enacted during the Obama administration. One example is the AOCI [Accumulated Other Comprehensive Income] opt-out of 2013, which permitted regional banks not to take a hit on capital when their marketable securities lost value. It was increased in 2018 to a higher bank asset threshold, but that didn’t impact SVB.”

She said that while some rules do need to be tweaked, the real question that needs to be asked is how to improve supervision – much of which the public does not see. “Think of it as an iceberg with most of the action below the water line,” she explained.

“The three reports from the Fed, the Government Accountability Office (GAO) and the Federal Deposit Insurance Corporation (FDIC) make it clear that there is work to do in that area,” Margaret added.

Supervision could take spotlight in post-SVB reforms,” IFLR (June 1, 2023) (subscription required)