Despite recent bank failures, the U.S. banking system remains safe, resilient and on a solid foundation. The banking industry is well-capitalized and has strong liquidity. As always, banks stand ready to meet the needs of their customers and communities and we continue to play a critical role in supporting and fueling the economy.

Following the failure of Silicon Valley Bank (SVB) and Signature Bank, several investigative reports have now been issued by banking regulators. On April 28, the Federal Reserve issued a report with respect to their oversight of SVB, the FDIC published its report with regard to the supervision of Signature Bank, and the Government Accountability Office released a report covering both failures. The California Department of Financial Protection and Innovation (DFPI) produced its report on SVB on May 8.

Key takeaways from the report issued by the Fed on SVB include findings that: SVB’s board of directors and management failed to manage their risks; Fed supervisors did not fully appreciate the extent of the vulnerabilities as SVB grew in size and complexity; supervisors did identify vulnerabilities but did not take sufficient steps to ensure SVB fixed those problems quickly; and, the Fed’s tailoring approach in response to regulatory relief impeded effective supervision.

Similarly, the DFPI’s report found that: SVB was slow to remediate regulator-identified deficiencies; regulators did not take adequate steps to ensure the bank resolved problems as fast as possible; recent rising interest rates led to SVB’s startup deposits decreasing and its investments losing value; SVB’s unusually rapid growth was not sufficiently accounted for in risk assessments; SVB’s high level of uninsured deposits contributed to the bank run; and, digital banking technology and social media accelerated the volume and speed of the run.

Distilling down the hundreds of pages from these reports, the findings affirm what many in the banking industry suspected, bank management and the board of directors failed to manage risk, regulators were aware of percolating issues and didn’t respond or escalate the matter soon enough, and technology has increased the velocity for which money can move.

In many ways, the fundamentals of banking were missed. Interest rate risk, liquidity risk, and concentration risk are foundational. Shocking the balance sheet to understand what might happen in different interest rate environments is innate. Notwithstanding, the debate has begun on whether more or less regulation would have avoided SVB’s failure or whether it will prevent future occurrences.

Several oversight hearings diving into these very questions have been conducted both before Congress and in California. Back in DC, back-to-back hearings were conducted on March 28 and 29 before the US Senate Banking Committee and the House Financial Services Committee, respectively. The California Assembly Committee on Banking and Finance held a preliminary hearing on April 10 followed by a joint oversight hearing between that committee and the Senate Committee on Banking and Financial Institutions on May 10. And then, three hearings took place in one week, two by the US Senate Banking Committee (May 16 and 18) and one in the House Financial Services Committee (May 17).

Meanwhile, the FDIC issued its proposed rule for the special assessment to address the $15.8 billion impact on Deposit Insurance Fund, a figure down from the $22 billion originally estimated. In issuing the draft rule, the FDIC noted that: in general, large banks with large amounts of uninsured deposits benefitted the most from the systemic risk determination; no banking organizations with total assets under $5 billion will be subject to the special assessment; the special assessment will be collected at an annual rate of approximately 12.5 basis points over eight quarterly assessment periods; and, collection will begin with the first quarterly assessment period of 2024.

With the failure of SVB and concerns regarding FDIC insurance coverage limits, especially those related to a business’ ability to meet payroll, the FDIC has published a comprehensive overview of potential options for deposit insurance reforms. Three options have been identified: maintaining the current deposit insurance framework, providing insurance up to a specified limit; extending unlimited deposit insurance coverage to all depositors; and, different deposit insurance limits across account types, where business payment accounts receive higher coverage than other accounts. While not an endorsement, the FDIC believes targeted coverage best meets the objectives of deposit insurance for financial stability and depositor protection. It’s important to note that all options require Congressional approval.

Legislatively, we will likely see proposals that roll back regulatory relief achieved just a few years ago from the Dodd-Frank Act, relief designed to create a more tailored and sophisticated approach to bank supervision. Proposals will likely focus on executive compensation, claw-backs, the barring of future employment in the industry, and the minimum qualifications of individuals serving on certain bank boards and committees.

As we move forward, there will be efforts to divide the industry based on asset size, the value of the dual banking system will be questioned, and some will wonder about the capacity for state regulators to supervise institutions that reach a particular asset size. During these times, it’s especially critical that we stand together, unified, to preserve the diversity of banks serving communities across the country. Community banks, midsize banks, regional banks, and large banks are integral to the success of our customers, communities and the overall economy. Banks of every size and business model add unique value and are a source of strength for our economy.