It’s big vs. small as banks square off to avoid new rules after failures

U.S. banks are pitted against each other as regulators move to strengthen oversight after a series of failures undermined confidence in the financial system.

In particular, regional banks, which are more likely to face new rules, are trying to persuade regulators to increase oversight of larger ones—who may have to cover a larger portion of the costs of bailouts. Meanwhile, members of Congress facing public anger over wealthy depositors being made whole are less amenable than ever to lobbying pitches for weaker regulation.

The lack of a unified message, entrenched differences and competing priorities mean that the financial sector is trying to sway the Federal Reserve, the Federal Deposit Insurance Corp. and Congress from multiple angles. That discord bodes poorly for the industry’s ability to influence new rules that will roll out in the coming months, despite spending $122.9 million on lobbying over the past two years.

Before the collapse of crypto-friendly lender Silvergate Capital and failures of regional institutions Silicon Valley Bank and Signature Bank, bigger banks such as U.S. Bancorp and PNC Financial Services were steeling themselves for more regulations since Michael Barr took over as the Fed’s No. 2 official last summer. Now, officials are likely to cast a wider net pulling in some smaller banks that have so far dodged the most rigorous oversight.

“Before all of this happened, we knew that additional regulations were on the table,” said Kyle Sanders, a financial services analyst with Edward Jones. “The events with SVB guarantee that there are regulations coming down the pike.”

March was one of the worst months for the financial sector in years, featuring two of the largest bank failures since the 2008 market collapse. In the U.S., where regional lenders have faced record outflows, the turmoil has triggered fears of bank runs and instability. San Francisco’s First Republic Bank, for one, has seen its stock plunge as investors worry it’s next to fall. Meanwhile, in Europe, UBS bought embattled firm Credit Suisse in a forced sale.

The U.S. banking landscape is vast, with more than 4,200 institutions. Likely to avoid new rules are the smallest banks, which are politically popular. So are the systemically important banks such as Bank of America and Citigroup already subject to regulations imposed after the 2008 financial crisis—although they’re concerned about the prospect of higher costs.

Indeed, the nation’s biggest banks may shoulder a larger-than-usual portion of the burden of replenishing the FDIC coffers, according to people familiar with the matter, after the agency guaranteed all SVB depositors, many of whom had holdings well above its limit. The FDIC, under political pressure to spare smaller lenders, is expected in May to propose the special assessment to cover its bailout costs.

The regulators’ sights are set on banks in the middle, where different unofficial factions have their own priorities: banks with more than $10 billion but less than $100 billion, those that have up to about $250 billion in assets, and super-regionals such as U.S. Bancorp, PNC, KeyCorp, and Truist Financial that rank just below the systemically important.

“The crisis has made it clear that banks between $100 billion and $250 billion will have to feel some pain” in addition to the super-regionals who were already in the crosshairs, Isaac Boltansky, the director of policy research at BTIG, said.

SVB, had it not been sold, likely would have fallen into the category of banks that would face more scrutiny. It had about $209 billion in assets at the end of last year.

The feeling among bank executives is that no matter what the deposit insurance threshold is, if there’s a poorly managed large bank that fails, its depositors will get bailed out, said one lobbyist, who asked not to be identified discussing client matters.

That’s caused the smaller lenders—those under $100 billion but more than the community institutions—to worry that they lack the size that will draw a government backstop. If they’re below the line where the Fed would step in, they have an inherent disadvantage to larger banks, the person said.

And in another boost for bigger banks, more regulation isn’t all bad for some of them, Boltansky said. With more oversight and increased costs come more protections. Plus, they enjoy being seen as safer places for depositors.

It’s unlikely midrange banks will recreate the success that they had in 2018, when Congress weakened regulations of the 2010 financial overhaul for them. Indeed, the White House has proposed new regulations for regional banks. These rules, which don’t need congressional approval, range from annual stress tests and liquidity requirements to strengthening supervisory tools to ensure banks can survive rising interest rates.

Meanwhile, banks are expecting new regulations that are still to be finalized from the Fed, such as expanded capital requirements, increased stress tests and tougher scrutiny from bank examiners after Barr, the Fed’s vice chair for supervision, assumed his role.

Although Congress has so far showed little appetite to tackle the financial sector quickly, banks wouldn’t get much help if Senate Banking Committee Chair Sherrod Brown has his way. The Democrat from Ohio in March told a room full of bankers to not even bother asking for Congress’s help.

“I don’t think it serves the stability of the banking sector’s purpose to come and lobby us for weaker standards,” Brown told the crowd at the American Bankers Association event. “I think we continue to pay the price if that happens.”