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The Fed may close the loophole that hid big losses at Silicon Valley Bank, report says

Apr 21, 2023, 20:55 IST
Business Insider
Silicon Valley Bank was shut down by regulators in March.Getty Images
  • The Fed may reverse an exemption that allows some midsize banks to conceal losses on securities they hold, The Wall Street Journal reported Friday.
  • The move would tackle a factor in last month's collapse of Silicon Valley Bank.
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The Federal Reserve is considering ending a reporting exemption that allows some midsize banks to conceal losses on securities they hold, The Wall Street Journal reported, a move that would tackle a factor in last month's collapse of Silicon Valley Bank.

Regulators are considering reversing a loophole that lets some banks boost the amount of capital they report for regulatory purposes, sources told the Journal in a report published Friday. Capital is the buffer banks have to hold to absorb potential losses.

Michael Barr, vice chair for supervision, is overseeing the review that could reverse a 2019 loosening of rules by the central bank.

Rules put in place after the global financial crisis directed banks with more than $250 billion in assets to include unrealized gains and losses on securities labeled "available for sale" in their capital ratios. But smaller regional banks could sidestep that requirement because of concerns it would inject too much volatility into their capital metrics, the report said. The largest regional banks won exemption in 2019.

Silicon Valley Bank, in needing to raise funds, sold its available-for-sale securities portfolio, resulting in after-tax loss of $1.8 billion in the first quarter of this year. The Fed's rate-hike campaign weighed on the value of SVB's bond holdings.

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The report pointed out that SVB was sitting on unrealized losses in a separate batch of securities the bank said it would hold to maturity. The losses weren't recognized in the bank's financial statements or in regulatory capital.

A subsequent run on deposits at SVB prompted the Fed and other regulators to seize the bank, a prominent lender to tech startups. Barr last month called SVB a "textbook case of mismanagement."

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