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Fed increasing demands for corrective actions by regional banks: report

The Federal Reserve has issued a number of private warnings to regional lenders as it seeks to tighten supervision following a spate of bank collapses.

The Federal Reserve is privately demanding that regional lenders shore up their liquidity planning, part of a broader effort to tighten supervision following a spate of bank collapses this year, according to Bloomberg News.

Regulators have already issued a slew of private warnings to lenders with assets of $100 billion to $250 billion, Bloomberg reported, citing people familiar with the matter. 

Citizens Financial, Fifth Third Bancorp and M&T Bank Corp. were among the banks that received warnings.

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The notices touched on everything from lenders' capital and liquidity to their technology and compliance, the report said. 

The Fed, Citizens Financial, Fifth Third and M&T declined to comment. 

Regional banks were at the epicenter of recent upheaval within the financial sector after the stunning collapse of Silicon Valley Bank and Signature Bank triggered a deposit run in early March.

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Authorities rushed to shore up confidence in the banking system with the launch of several emergency measures, but regional banks remain on edge. 

S&P and Moody's both downgraded a number of small and mid-sized banks earlier in August, citing concerns over higher interest rates, rising funding costs and increased risk from the commercial real estate sector. 

"U.S. banks continue to contend with interest rate and asset-liability management (ALM) risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress the value of fixed-rate assets," Moody’s analysts said of the decision.

Moody's also placed six banking giants – including U.S. Bancorp, Bank of New York Mellon and Truist Financial – on review for potential downgrades.

The back-to-back downgrades come in the midst of the most aggressive monetary policy tightening campaign in decades. The Fed in July approved another interest rate hike, lifting the benchmark rate to the highest level since 2001. 

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Chairman Jerome Powell signaled last week that additional rate hikes may be on the table this year as policymakers assess whether high inflation has retreated for good. 

"We expect banks’ ALM risks to be exacerbated by the significant increase in the Federal Reserve’s policy rate as well as the ongoing reduction in banking system reserves at the Fed and, relatedly, deposits because of ongoing QT," the Moody's report said. 

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