Fed’s Barr signals tougher bank stress tests post-SVB

BY: ZACHARY WARMBRODT | 03/27/2023 11:56 AM EDT

Federal Reserve Vice Chair for Supervision Michael Barr will tell lawmakers this week that regulators should strengthen bank stress testing to capture a wider range of risks and potential avenues for financial contagion following the collapse of Silicon Valley Bank.

Barr said in prepared testimony for Tuesday’s Senate Banking hearing on SVB that the lender’s failure “illustrates the need to move forward with our work to improve the resilience of the banking system.”

In addition to stress testing, Barr said the Fed must explore changes to its liquidity rules and “other reforms.” He also cited the “critical” need to revamp capital requirements — work that was already underway pre-SVB — and bolster loss-absorbing buffers at large banks that are smaller than the handful of systemically important institutions.

Barr said SVB’s failure is “a textbook case of mismanagement.” As part of the Fed’s review of what went wrong at the bank, Barr said the Fed will look at 2019 regulatory changes implemented after Congress eased rules for regional banks in 2018.

“At the time of its failure, SVB was a ‘Category IV’ bank, which meant that it was subject to a less stringent set of enhanced prudential standards than would have applied before 2019,” Barr said.