As evidenced in last week’s congressional oversight hearings, there appears to be some confusion about whether the Federal Reserve retained authority and discretion to apply enhanced prudential standards to Silicon Valley Bank after passage and implementation of the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The answer to this question is clear: under both the text of EGRRCPA and the Federal Reserve’s own regulations, the Federal Reserve retained ample authority to do so – and could have done it as soon as early 2021 by issuing an order directing the fast-growing SVB to meet more stringent regulatory requirements.
By way of background, Section 165 of the Dodd-Frank Act of 2010 put in place a new framework requiring the Federal Reserve to establish enhanced capital, liquidity and other prudential standards for bank holding companies with more than $50 billion in consolidated assets. (See 12 U.S.C. § 5365.) Recognizing the bluntness of this framework and the relative lack of tailoring of regulation for banks over that threshold, Congress enacted EGRRCPA in 2018, which (i) raised the threshold for mandatory application of enhanced prudential standards to bank holding companies with more than $250 billion in assets and (ii) directed the Board to tailor application of those standards to bank holding companies with between $100 billion and $250 billion in assets based on their size, complexity, risk profile and other relevant factors. (See § 401 of EGRRCPA.) The Federal Reserve issued final rules to implement EGRRCPA in October 2019, which became effective at the end of 2019. (See 84 Fed. Reg. 59032.)
Because SVB had grown to more than $100 billion in assets by the end of 2020 and more than $200 billion by the end of 2021, some have suggested that these statutory changes — either on their own or based on how the Federal Reserve implemented them — affirmatively precluded the Federal Reserve from applying to SVB the more stringent capital, liquidity and other prudential standards that generally applied to banks with more than $250 billion in assets post-EGRRCPA. That is simply incorrect.
First, as a statutory matter, EGRRCPA was crystal clear in granting the Federal Reserve with authority to do so, by providing as follows:
The Board of Governors may by order or rule promulgated pursuant to section 553 of title 5 apply any prudential standard established under this section to any bank holding company or bank holding companies with total consolidated assets equal to or greater than $100,000,000,000 to which the prudential standard does not otherwise apply provided that the Board of Governors—
(i) determines that application of the prudential standard is appropriate—
(I) to prevent or mitigate risks to the financial stability of the United States, as described [earlier in the statute]; or
(II) to promote the safety and soundness of the bank holding company or bank holding companies; and
(ii) takes into consideration the bank holding company’s or bank holding companies’ capital structure, riskiness, complexity, financial activities (including financial activities of subsidiaries), size, and any other risk-related factors that the Board of Governors deems appropriate. (12 U.S.C. § 5365(a)(2)(C).)
Importantly, this grant of authority is not only broad in scope, applying to any type of enhanced prudential standard under Section 165. It is also procedurally broad, as it permits the Federal Reserve to apply such standards to any bank holding company over $100 billion in assets on an individual basis, and to do so either by regulation or by order. As the Federal Reserve explained when issuing rules to implement EGRRCPA in October 2019, this statutory language “permits the Board to apply any enhanced prudential standard or standards to an individual bank holding company and also permits the Board to apply enhanced prudential standards to a class of bank holding companies,” and “provides the Board with discretion in differentiating among companies on an individual basis or by category.” (84 Fed Reg 59032 at 59037.)
Thus, the law is unequivocal and clear: the Federal Reserve could have applied enhanced prudential standards to SVB after it crossed the $100 billion asset threshold in the fourth quarter of 2020, and could have done so either by amending its own rules or by issuing a regulatory order directly to SVB. To do so, it would have need only have satisfied two basic criteria, both of which would appear to have been met – first, to determine that applying those rules was appropriate to promote SVB’s safety and soundness or mitigate financial stability risks, and second, to take into consideration SVB’s unique risk profile and business model.
This statutory authority is mirrored in the Federal Reserve’s own rules, as revised post-EGRRCPA. As the Federal Reserve again pointed out to banks when issuing rules to implement EGRRCPA in October 2019, the Federal Reserve expressly “retain[ed] the general authority under its enhanced prudential standards, capital, and liquidity rules to increase or adjust requirements as necessary on a case-by-case basis.” (84 Fed Reg 59032 at 59049.) For example, the Federal Reserve’s enhanced prudential standards regulation post-EGRRCPA include a “reservation of authority” provision that reads as follows:
(a) In general. Nothing in this part limits the authority of the Board under any provision of law or regulation to impose on any company additional enhanced prudential standards, including, but not limited to, additional risk-based or leverage capital or liquidity requirements, leverage limits, limits on exposures to single counterparties, risk-management requirements, stress tests, or other requirements or restrictions the Board deems necessary to carry out the purposes of this part or Title I of the Dodd-Frank Act, or to take supervisory or enforcement action, including action to address unsafe and unsound practices or conditions, or violations of law or regulation.
(b) Modifications or extensions of this part. The Board may extend or accelerate any compliance date of this part if the Board determines that such extension or acceleration is appropriate. In determining whether an extension or acceleration is appropriate, the Board will consider the effect of the modification on financial stability, the period of time for which the modification would be necessary to facilitate compliance with this part, and the actions the company is taking to come into compliance with this part.
Importantly, this provision of the Federal Reserve’s own rules not only echoes the broad statutory flexibility to apply any enhanced prudential standard to SVB by general rule or direct order, but also expressly reserves the right for the Federal Reserve to accelerate compliance dates for rapidly growing firms such as SVB once they cross any of the general thresholds for application of specific enhanced prudential standards. The Fed’s capital and liquidity rules have similar reservations of authority, which would equally have applied to SVB. (See 12 CFR 217.1(d); 12 CFR 249.1(b)(1)(iii) and 249.2.)
Thus, there may be significant questions as to why the Federal Reserve did not exercise its authority to apply certain more stringent enhanced prudential standards to SVB in light of its rapid asset growth, unique business model, reliance on uninsured deposits and significant liquidity and interest rate risk profile. However, there should be no question about whether it could – the plain language of both EGRRCPA and the Federal Reserve’s own 2019 rules make clear that they certainly did not lack the authority to do so, and that such an action could have been done either by rulemaking or by direct order.