Trump 2.0 bank supervision: simpler but no soft touch?

After being appointed chair of the Commodity Futures Trading Commission during Donald Trump’s first presidency, Christopher Giancarlo summed up his regulatory philosophy with the acronym KISS – keep it simple, stupid. In a speech on January 10, 2025, the Republican vice-chair at the Federal Deposit Insurance Corporation, Travis Hill, struck a similar note.

Hill said the official reviews released after the collapse of Silicon Valley Bank in March 2023 had revealed a supervisory “emphasis on process rather than core financial risks” in examining how the doomed lender was run.

“The focus on process is an attempt to indirectly encourage better management of risks,” said Hill, widely tipped to be Trump’s pick for FDIC chair when Martin Gruenberg departs on January 19. “This might work on the margins, but only if the improvements to process actually result in better management of risk and/or less risky banks.”

Instead, Hill warned, supervisory criticisms “often have little bearing on a bank’s actual health or solvency”, create a “crushing” compliance burden, and may even distract banks and examiners from tackling real risks.

There’s plenty of evidence from the SVB failure to back up this line of argument. Letters identifying Matters Requiring Attention (MRAs) – the central tool of US bank supervisors – piled up on SVB’s doormat during 2022 but were largely ignored by a bank that ran without a chief risk officer for almost a year. And while one of those MRAs concerned the bank’s modelling of depositor behaviour, none of them directly addressed the risks that ultimately destroyed the bank. Those risks were a large portfolio of fixed-rate bonds that were accounted for on the banking book at well above their market value, and a deposit base concentrated among technology venture capital investors whose funds were well above the limit for deposit insurance.

However, anyone assuming that promises of a lighter compliance burden at a Republican-run FDIC would mean less intrusive regulation should be careful what they wish for.

In reality, the fatal SVB risks are a matter of bipartisan concern, and Democrat-appointed Federal Reserve vice-chair Michael Barr has already proposed regulatory reforms designed to tackle them. First, he wants to remove a filter that exempts large US regional banks from recording the capital impact of changes in market value for securities booked as available for sale (AFS). If SVB had been obliged to mark its AFS book to market as US interest rates rose, its publicly disclosed capital ratio would have been flashing warning signs long before depositors took fright in March 2023.

Secondly, Barr thinks some of the securities that a bank regards as part of its liquidity buffer – to be sold for cash to meet liabilities in a stressed market – should be included in the AFS portfolio, rather than being recorded as held-to-maturity. As deposit withdrawals accelerated in 2023, SVB began to sell down some of its HTM portfolio at a significant loss.

SVB was far from the only US regional bank to exhibit these vulnerabilities. So, if its demise inspires Republicans to adopt a focus on “pure” financial valuations, what would that mean for other US regional banks in theory? According to calculations by our colleagues at Risk Quantum, the removal of the AFS prudential filter and the inclusion of more of the liquidity book in the AFS portfolio could have a substantial combined impact on capital ratios.

Hill didn’t mention these possible rule changes during his speech. Instead, he suggested the FDIC would concentrate on financial risk via the ‘S’ in its CAMELS rating system – ‘S’ for sensitivity, such as sensitivity to moves in interest rates. But it would seem perverse if supervisors identified that a bank like SVB had severe sensitivity to interest rate risk, yet didn’t require any kind of remedial action. That could be either a precautionary capital increase or a major structural change in its asset and liability management, which are the kind of responses set out in the European regime on interest rate risk.

Even under a Republican administration, US regional banks may be hard pushed to avoid greater supervisory focus on interest rate risk and perhaps even higher capital requirements generated by their liquidity books and AFS portfolios. Little wonder that Hill indicated such changes “will take time” – there can be no doubt that affected banks will lobby for a long transition period.