Banking regulators propose long-term debt, resolution plan requirements for larger banks

Banking regulators today unveiled a proposed long-term debt requirement for banks with more than $100 billion in assets. The requirement is part of a package of proposed rulemakings that the FDIC, Office of the Comptroller of the Currency and Federal Reserve have been pursuing since before the recent bank failures.

Under the proposed rule, a covered bank would be required to have a minimum outstanding amount of eligible long-term debt that is at least 6% of the institution’s total risk-weighted assets, 2.5% of its total leverage exposure (if it is required to maintain a minimum supplementary leverage ratio) and 3.5% of its average total consolidated assets, whichever is greater. Banks would have three years to comply with the requirement after the date they become subject to the rule, but partial compliance would be scaled up during the phase-in period.

The FDIC board unanimously voted in favor of moving forward with the proposal. Chairman Martin Gruenberg said the agency anticipated the proposed requirement would marginally increase funding costs for covered banks and result in a decline of net interest margins of about three basis points. While voting to advance the proposal, FDIC Vice Chairman Travis Hill and board member Jonathan McKernan said they had reservations that need to be addressed in coming months. “We need to acknowledge bank failures are an inevitable feature of a dynamic and innovative economy, and we should plan for those bank failures by focusing on strong capital and an effective resolution framework as our best hope for putting an end to the habit of privatizing gains and socializing losses,” McKernan said.

Agencies weighing new resolution plan requirements

The FDIC also moved forward with proposed requirements for resolution plans for banks with more than $100 billion in assets, as well as new information filing requirements for banks over $50 billion. It also voted to proceed with a more formalized process for dealing with receiverships for institutions over $50 billion, although members stopped short of first requiring board approval for sales of midsized and large failed banks.

Gruenberg said that new requirements for resolution plans seek to expand the options available to the FDIC by requiring banks over $100 billion to submit a plan not depending on an over-the-weekend sale in the event of a failure. The agency is also seeking additional information and analysis from banks with $50 billion to $100 billion in assets. Hill and McKernan voted against the new resolution plan requirements, saying that the agency was focusing on the wrong things in its response to the bank failures.

The board also voted 3-2 against a proposal by McKernan to require board approval of failed bank sales but advanced an agency proposal that would formalize its receivership process for banks with more than $50 billion.

In addition, the FDIC and Federal Reserve advanced proposed agency guidance for resolution plan submissions—also known as “living wills”— for banks with more than $250 billion. The guidance is organized around key areas of potential vulnerability, such as capital, liquidity, and operational capabilities that could be needed in resolution, according to the agencies.

ABA disappointed with proposals

An FDIC proposal to expand resolution planning rules for banks with as little as $50 billion in assets and impose long-term debt requirements for banks with assets of $100 billion or more are another step in the wrong direction, American Bankers Association President and CEO Rob Nichols said. Both actions come on top of last month’s “misguided” capital requirement proposal and run counter to a bipartisan law approved by Congress requiring that regulations be tailored based on a bank’s risk and business model, he added.

“We will advocate strongly to ensure that regulators understand the harm that these overly broad rules would impose on customers, communities and the banks that serve them,” Nichols said.

While disappointed in the resolution rules, ABA believes that the FDIC’s proposed reforms to the process of selling certain failed banks could be a positive development, Nichols said. “By allowing a wider range of bidders—as long as they meet the same requirements that apply to any other parties seeking control of a bank or acquisition of deposits, or the requirements to purchase assets—these changes could potentially result in more price competition without diluting the appropriate safeguards on who can own a bank,” he said.