Two Impacts From March’s Bank Failures: Incoming Regulations and Small Businesses Taking a Hit

1/ Tighter regulations could be coming (back) for mid-sized banks.

Yesterday, the Biden administration proposed tougher regulations on banks with $100-250B in assets. What’s in the proposal?

• More regular stress tests (one every other year → yearly) analyzing whether banks can handle extreme risks or worstcase scenarios.
• Stricter liquidity standards — requiring banks to hold more high-quality assets.
• Greater oversight to ensure they can handle higher interest rates (what got us in this mess in the first place).

In 2018, the threshold was lifted to $250B under Trump’s administration, putting the now-collapsed Silicon Valley Bank outside these requirements.

2/ Tougher times coming for small businesses. Smaller banks play a big role in the economy’s growth — and small-businesses rely on them for loans.

According to Florida Atlantic University professor Rebel Cole, the 13 largest banks accounted for less than 23% of small-business loans (WSJ).

But life’s about to get a lot harder for them.

• Instead of lending money out, smaller banks are likely to hold more cash to cover any risk of withdrawals.
• As a result, businesses could find it harder to borrow or will pay higher rates on loans — negatively impacting the economy.