In the wake of three bank failures last spring, and as the commercial real estate bust continues to unfold, federal bank regulators are pressing small and regional banks to add to their liquidity, Bloomberg reported.

We continue to document the demise of the commercial real estate market in our Spotlight section “Office Building Bust” in this issue and many others.

The U.S. Federal Reserve has quietly issued warnings to banks with $100 billion to $250 billion in assets, prodding them not only to build up their liquidity but also to update their technology and sharpen their adherence to regulations.

Banks receiving the notices include Citizens Financial Group Inc., Fifth Third Bancorp, First Citizens Bancshares, Huntington Bancshares, KeyCorp, M&T Bank, and Regions Financial Corp., according to people familiar, Bloomberg said. 

The warnings arise from a pledge last spring to Congress by Michael Barr, the Fed’s vice-chair for supervision, to “improve the speed, force, and agility” of supervision.

These written warnings require a formal response from a bank’s board of directors and a timeline for the corrective actions regulators specify. If deficiencies are ignored or not repaired, the Fed can impose penalties.

“The bigger concern is the time frame we’re talking about for resolution,” said financial services attorney Gary Bronstein at law firm Kilpatrick Townsend & Stockton. “We’re going to start seeing [regulators] impose tight deadlines. If banks are not resolving these issues quickly, we’ll see enforcement actions.” 

Even big banks are getting a closer look.

Goldman Sachs is hiring hundreds more people to fix problems regulators have flagged. Discover Financial Services also is expanding its staff to attend to regulatory shortcomings.  

“There’s just been a very noticeable and heightened regulatory focus on anything liquidity, deposits, or funding related,” attorney James Stevens, a specialist in the financial industry at law firm Troutman Pepper, said in a Bloomberg interview. 

“I can’t think of ever experiencing such an acute focus on deposits, liquidity, and funding risk. That’s manifesting itself in a lot of rule-making and a lot of on-site examination questions,” he added.

TRENDPOST: Regulators’ relatively sudden desire to do their job effectively comes at a particularly bad time.

Banks are being asked to build liquidity at a time when they must pay more interest to keep their depositors, when more commercial real estate loans are turning sour, and they hold about $500 billion in unrealized losses on low-yield bonds they bought during the COVID War.

Now banks also are being prodded to expend more resources on complying with more stringent directives from 

Under regulators’ tough love, more banks will be pushed to the brink of insolvency and will be merged with larger rivals. More banks also will fail as a first step to being subsumed by competitors.

The result: customers will be served by fewer banks and be given fewer choices. The reduced competition will allow banks to innovate less, to pay less attention to customers, and more attention to their shareholders and executive compensation.