Federal banking regulators will soon propose a long-term debt requirement for banks with more than $100 billion in total assets, a decision influenced by the recent bank failures, FDIC Chairman Martin Gruenberg said today. In a speech at the Brookings Institution in Washington, D.C., Gruenberg outlined additional steps federal regulators are taking in response to the bank failures earlier this year. They include a new long-term debt requirement, previously proposed tougher capital standards for banks over $100 billion, and strengthened resolution planning for banks over $50 billion.
The FDIC, OCC and Federal Reserve will propose that banks over $100 billion be required to issue long-term debt sufficient to recapitalize the bank in resolution, Gruenberg said. While many regional banks have some outstanding long-term debt, the new proposal will likely require the issuance of new debt, he added.
The requirement would bolster financial stability by absorbing losses before the depositor class takes losses and creating additional options in resolution, Gruenberg said. And since the debt is long-term, it will not be a source of liquidity pressure when problems become apparent, he added. “Unlike uninsured depositors, investors in this debt know that they will not be able to run when problems arise. This gives them a greater incentive to monitor risk in these banks and exert pressure on management to better manage risk.”
FDIC to tighten resolution plan reporting
The FDIC will also propose strengthening resolution plan requirements for banks over $100 billion, and while smaller banks will not be required to submit full plans, the agency is still planning to require additional details from banks with more than $50 billion, Gruenberg said.
Since 2012, FDIC rules specified that banks over $50 billion should periodically submit plans to provide the FDIC with information regarding resolution planning. The proposed rule would require a bank to provide a strategy that is not dependent on an over-the-weekend sale, Gruenberg said. It also would require a bank to explain how it could be placed into a bridge, how operations could continue while separating itself from its parent and affiliates, and the actions that would be needed to stabilize a bridge.
Additionally, the rule would require banks to identify franchise components, such as asset portfolios or lines of business that could be separated and sold, in order to provide additional options for exiting from resolution by disposing of parts of the bank to reduce the size of a remaining bank and expand the universe of possible acquirers, he said.
In addition to the proposed rule changes, the FDIC is reviewing whether its supervisory instructions on funding concentrations for large regional banks should be bolstered to better capture risks related to high levels of uninsured deposits generally or types of deposits more specifically, such as business operating account deposits, Gruenberg said.
ABA disappointed with proposed regulatory changes
The proposed regulatory changes announced by Gruenberg echo the misguided capital changes unveiled in July and will only make it harder for already safe and sound banks to serve their customers and communities, ABA President and CEO Rob Nichols said in response to the FDIC chairman’s remarks.
“In particular, his call for expanding resolution planning rules for banks with as little as $50 billion in assets and expanding long-term debt requirements for banks with assets of $100 billion or more will simply make it more difficult for those already highly regulated and well-capitalized banks to support the economy,” Nichols said. “The one-size-fits-all approach also further undermines the bipartisan legislation passed by Congress in 2018 that prudently requires regulators to tailor rules based on a bank’s risk and business model.”
Just as concerning was Gruenberg’s call for altering the supervisory treatment of uninsured deposits and labeling them as unstable for purposes of deposit insurance pricing, Nichols added. “As the FDIC considers possible changes, it must recognize that uninsured deposits are not uniform and not an accurate proxy for liquidity risk or the effectiveness of liquidity risk management.”
