Fed Pushes For Regional Banks To Improve Liquidity, Address Tech Flaws After Silicon Valley's Failure

U.S. regional banks are under the regulatory magnifying glass as the Federal Reserve discreetly pushes for enhanced liquidity planning. Following a series of bank failures this year, hitting the central bank has reportedly been issuing confidential warnings to lenders with assets ranging from $100 billion to $250 billion.

Among these, Citizens Financial Group Inc. CFG, Fifth Third Bancorp FITB, and M&T Bank Corp. MTB have been recipients, as Bloomberg reported Wednesday.

The notices span various topic, from capital and liquidity to technology and compliance.

The private admonitions, termed matters requiring attention (MRAs) and matters requiring immediate attention (MRIAs), serve as red flags demanding corrective measures from the boards of the affected banks.

Regulatory scrutiny has tightened significantly, driven by Michael Barr, the Fed's vice chair for supervision, who pledged to bolster oversight earlier in the year following the failures of First Republic Bank, Silicon Valley Bank and Signature Bank.

Category IV Banks in Focus: Unseen Pressures On Midsize Lenders

The increased regulatory focus also extends to Category IV banks, which share a size range with the banks that faced failure this year.

Previously, these banks experienced relatively lighter supervision, but recent efforts have changed that. The group includes notable names like KeyCorp KEY, Huntington Bancshares Inc. HBAN Regions Financial Corp. RF and First Citizens BancShares Inc. FCNCA.

Impact On The Industry: Rising Costs

The presence of MRAs and MRIAs is not unusual, but for regional banks, a barrage of these warnings could translate into increased costs for compliance and risk management. In escalated cases, banks might face monetary penalties. This regulatory pressure has also manifested in the market.

On Wednesday, the SPDR Regional Banking ETF KRE fell 0.6%, underperforming the SPDR S&P 500 ETF Trust SPY, up 0.4%, and the Financial Select Sector SPDR Fund XLF, up 0.2%.

Metropolitan Bank Holding Corp. MCB led the losses among regional banks, plummeting 2.6%. Larger regional players like Zions Bancorporation ZION, Western Alliance Bancorporation WAL, and Pinnacle Financial Partners, Inc. PNFP also experienced declines.

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