A long-term debt requirement for banks with $100 billion or more in assets will soon be proposed by federal banking regulators, the leader of the federal insurer of bank deposits said Monday.
That proposal will be one of at least two likely coming from the agency in the near future, he added – with the other to focus on resolution plans for insured banks.
In remarks during an event sponsored by the Brookings Institution of Washington, D.C., Federal Deposit Insurance Corp. (FDIC) Board Chairman Martin Gruenberg said the proposal is one of a series of regulatory initiatives being taken in the wake of the failure of three regional banks earlier this year. Those banks were Silicon Valley Bank (SVB) of Santa Clara, Calif., Signature Bank of New York, N.Y. (which both failed in March) and First Republic Bank of San Francisco (which failed in May).
The agencies in July proposed a capital rule that would, among other things, require that unrealized losses on available for sale securities would flow through regulatory capital for all banks with more than $100 billion in assets. Gruenberg said that means that those banks, to maintain their capital levels, would need to retain or raise more capital as these unrealized losses occur.
But there is more to come, he indicated.
Regarding the proposed long-term debt requirement, the FDIC chairman said each covered bank would be required to issue long-term debt sufficient to recapitalize the bank in resolution. “While many regional banks have some outstanding long-term debt, the new proposal will likely require issuance of new debt,” he said.
He added that the agencies “expect the proposal to provide for a reasonable timeline” to meet the debt requirement and to consider existing debt outstanding. The $100 billion threshold, he said, was influenced by the failure of the three regional banks last spring.
“Such a long-term debt requirement bolsters financial stability in several ways,” Gruenberg maintained. “It absorbs losses before the depositor class – the FDIC and uninsured depositors – take losses. This lowers the incentive for uninsured depositors to run. Even if the institution fails, the buffer of long-term debt reduces cost to the Deposit Insurance Fund, and makes it more likely that a closing weekend sale could comply with the statutory least-cost test and avoid the need for a systemic risk exception.
“Further, it creates additional options in resolution, such as recapitalizing the failed bank under new ownership or breaking up the bank and selling portions of it to different acquirers, as an alternative to a merger with another large institution,” he said.
In other comments, Gruenberg suggested his agency would soon propose another rule soon – on improving the effectiveness of bank resolution plans and to setting “clear expectations for the banks with respect to the content of these plans.”
“We have determined that a rulemaking is the best approach to meet those goals in a way that is both transparent and effective,” Gruenberg said. He said the agency FDIC plans to issue a notice of proposed rulemaking soon that will be a comprehensive restatement of the existing rules for notice and comment. The existing rule, he said, requires covered banks to develop and submit detailed plans demonstrating how they could be resolved in an orderly and timely manner in the event of receivership.
“In developing the proposal, we have incorporated the most useful elements of past feedback and guidance, as well as lessons learned from past plans and resolutions,” he said.
He added that institutions under $100 billion in assets can also present resolution challenges. “While we do not propose requiring full plans for these banks under the strengthened rule, we will propose requiring certain information from banks over $50 billion to inform our resolution planning,” he said.