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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 32 May 2023 C O V E R F E A T U R E unimportant exposure in one marketplace is catastrophic in another. Sensitivity to market conditions and exposures should be part of supervision. Van Doorsselaere: The U.S. Congress tailored some banking regulations in 2019, raising the thresholds for banks to adhere to certain prudential metrics (primarily based on total assets, short-term wholesale funding, nonbank assets, and off-balance sheet exposures). This resulted in mid-size banks (those with more than $700 billion in assets) not needing to comply with most of the advanced Basel regulations. Mid-sized banks, especially those that have experienced rapid growth over the past few years, must ensure they have built a robust internal balance sheet management system to identify critical gaps. Incorporating a holistic risk management framework will not only support regular business operations but give banks the ability to recognize and act quickly when an unexpected event occurs. Muoio: The degree to which investors and depositors derive comfort from increased supervision suggests that regulators will enhance their scrutiny of the next-tier banks outside the majors. However, it is very difficult to fully anticipate the mechanics of the next crisis. Interestingly in this case, even if these regional banks had been subjected to the same level of stress testing as larger institutions, the danger may not have been fully identified. The stress tests were based on the impact of falling interest rates and not rising rates. The initial regulatory reaction is likely to focus on how warning flags are handled internally by the Federal Reserve. An unintended consequence could be an overreaction to a developing event that might result in banks making their lending criteria too restrictive. Vella: Increased supervision by the Federal Reserve and the FDIC will help identify issues earlier in the evolution of a serious problem. Regulation around capital requirements and loss reserves will also help mitigate future issues if properly managed. The key will be how we manage inflation key indicators, rate increases, and decreases to help smooth out the line of sight for financial institutions and the mortgage industry. Crisis Averted? I n the end, both SVB and Signature Bank avoided total gloom and doom as both institutions were acquired by other entities just weeks after their initial collapse. The FDIC entered into a purchase and assumption agreement for substantially all deposits and certain loan portfolios of Signa- ture Bridge Bank by Flagstar Bank, a wholly- owned subsidiary of New York Community Bancorp (NYCB). The 40 former branches of Signature Bridge Bank will operate under NYCB. The FDIC estimates the cost of the failure of Signature Bank to its Deposit Insur- ance Fund to be approximately $2.5 billion. The FDIC also entered into a purchase and assumption agreement for all deposits and loans of 17 former branches of Silicon Valley Bridge Bank by First-Citizens Bank & Trust Company of Raleigh, North Carolina. Depositors of Silicon Valley Bridge Bank automatically became depositors of First- Citizens Bank & Trust Company. The FDIC estimates the cost of the failure of Silicon Valley Bank to its Deposit Insurance Fund to be approximately $20 billion. Critic, dramatist, educator, essayist, novel- ist, and poet George Santayana, a Spanish- born American philosopher regarded as one of the most important thinkers of the first half of the 20th Century, echoed Churchill's sentiments on history when he said, "Those who do not remember the past are con- demned to repeat it." Will the failures of SVB and Signature Bank go down in history as lessons not worth repeating, or will their demise serve as just blips on the radar for future such events? Only time will tell, but the lessons learned from these banking casualties should serve to educate future generations on the perils of walking a financial tightrope for years to come. Increased supervision is not the solution, in my opinion. I think sensitivity to what is being supervised is the issue. There should be a playbook on what needs to be supervised in various economic conditions. In other words, supervision should be dynamic, not static." —Stanley C. Middleman, President and CEO, Freedom Mortgage Corporation