The recent collapse of Silicon Valley Bank (SVB) has raised questions about the future of regulating banks. Smaller banks and building societies have been calling for more proportionate and prudential regulation, arguing that the rules designed to prevent another financial crisis after 2007-08 are complex and burdensome. The Prudential Regulation Authority (PRA) has introduced an initiative called the “Strong and Simple” regime in the UK, which aims to simplify the prudential framework for non-systemic banks and building societies while maintaining their resilience.
Lessons from the US Approach
The US Federal Reserve Board introduced changes to the “Enhanced Prudential Standards” in January 2019, which aimed to relax regulatory requirements for smaller banks with less risk, while maintaining stringent requirements for larger banks that pose greater risks to the financial system. SVB, a mid-sized bank, benefited from these relaxed rules, including an exemption from including movements in Accumulated Other Comprehensive Income in regulatory capital, which allowed it to present a stronger capital position. However, the bank was not subjected to the same stress testing standards as larger banks, which may have revealed the flaws in its business model.
The collapse of SVB had broader systemic implications, as mid-sized and smaller regional banks in the US experienced sharp deposit outflows, with depositors fearing that state intervention would prioritize larger banks in a crisis. This highlights the need to re-evaluate what constitutes systemic and the potential repercussions of relaxing regulations for smaller banks.
Implications for UK Regulators
The collapse of SVB provides context for UK regulators as they develop the “Strong and Simple” regime. While there is a need for proportionate regulation for smaller banks to survive the business cycle, it should not be significantly less robust than that applied to larger banks. The “Strong and Simple” proposals include removal of certain reporting requirements, simpler templates, and reduced market disclosures, but these changes do not amount to a regime that is significantly less robust. The £20bn threshold proposed by the PRA is also much lower than the $250bn limit set in the US. Nonetheless, recent events may prompt regulators to reconsider what is considered systemic and where the line should be drawn.
The collapse of SVB and the subsequent deposit outflows in smaller banks in the US highlight the potential systemic implications of failures of mid-sized banks. This provides important lessons for UK regulators as they consider the future of bank regulation under the “Strong and Simple” regime. While there is a need for proportionate regulation for smaller banks, it should not be significantly less robust, and the threshold for what constitutes systemic should be carefully evaluated. The ongoing consultation by the PRA on the “Strong and Simple” regime will reveal further details, including how capital is calculated, and will likely shape the future of bank regulation in the UK.