A year ago today, U.S. financial officials were head down in trying to stem the fallout from Silicon Valley Bank’s collapse, an effort that culminated in a decision to protect uninsured deposits at the lender and at Signature Bank, which failed the same weekend. Now, they’re focused on the longer-term question of how to prevent that same kind of thing from happening again, ensuring that regional banks are less likely to run into trouble and more resilient in the face of distress. MM sat down with Acting Comptroller of the Currency Michael Hsu this past week to talk about what’s in the works. Top of mind right now: making sure banks are ready to use the Federal Reserve’s discount window, where they can pledge good collateral to quickly get funds to help them weather deposit outflows or meet other obligations. That’s important, Hsu said, because while highly liquid assets can be turned into cash over a period of a couple of weeks, “if you have a couple of hours, the discount window is pretty much the only place that can do that in size, at scale, with a high degree of confidence.” (SVB saw that a dizzying $100 billion in deposits was about to leave the bank the day it was closed). For his part, the OCC head has suggested allowing banks – in their contingency planning – to factor in the use of the discount window for only a short period, such as five days, in an effort to push firms to have responsible cash management while also making sure they use the Fed facility when they need to. These types of liquidity questions are being examined by the banking agencies alongside a slew of other regulatory efforts – higher capital, requirements for regional banks to have long-term debt that can be bailed in as equity if they fail, guardrails around the kind of incentives that should flow from how financial executives are compensated, and guidelines around bank mergers. Hsu says he hopes all of that can get done this year but wouldn’t speak much to more specific timing. He also weighed in on the Basel III endgame, which would toughen capital requirements for the biggest banks. Federal Reserve Chair Jerome Powell last week said he expected “broad and material changes” to the proposal. Hsu wouldn’t speak as definitively but said they’re taking feedback seriously and that he is open to extensive changes. “If there's a better way to capture a particular risk, make it both risk-sensitive and consistent, and calibrated in a way that’s prudent and reasonable, and it’s better than what we proposed, we will obviously take a really close look at that and consider it,” he said. “I don't want to prejudge where all of that takes us or the timing or anything like that.” On mergers, Hsu has begun the process of revamping how his agency reviews deals (which MM has reported on previously). Your guest host asked Hsu what to make of the provision that says mergers are “consistent with approval” if they would create an institution with less than $50 billion in assets. He said that doesn’t mean bigger deals won’t be approved, they’re just likely to trigger more scrutiny. Some mergers are easier yeses, some are easier nos, and “a lot of these are in between,” he said. “That line is just demarcating what is likely to be in between,” said Hsu. “To require, you know, analysis. Now, whether it’s heightened analysis or not really depends on the attributes of what’s being put on the table.” Read more from our Q&A here. Happy Monday — Send tips to zwarmbrodt@politico.com.
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