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The three federal bank regulators, worried about future bank failures, have proposed stricter rules on long-term debt requirements for banks with over $100 billion in assets, as well as new rules for resolution plans or “living wills” that would impact banks with as little as $50 billion in assets.
FDIC, OCC, and the Federal Reserve said in a joint statement on Tuesday that by requiring each of the nation’s largest regional banks to maintain a minimum amount of long-term debt to absorb losses, the proposal would increase the options available to resolve such banks in case of failure.
“Additionally, by reducing the risk that uninsured depositors would face losses, long-term debt can reduce the speed and severity of bank runs, and limit the risk of contagion when a bank is under stress,” the regulators said.
The recent failures of Silicon Valley Bank, Signature Bank, and First Republic Bank last spring underscored the importance of creating more loss-absorbing resources that the regulators can use to resolve banks, the three banking agencies said, which can in turn reduce costs and the level of disruption in the banking system.
Members of the FDIC board approved both the proposed rules on long term debt requirement and resolution plan requirement. On the same day, the regulators also requested comments on the proposals, which are be due by Nov. 30.
The regulations wouldn’t cover smaller, Massachusetts-based regional banks like Eastern Bank, Rockland Trust and Berkshire Bank. But out-of-state banks with a big presence in the local market, like $202 billion-asset M&T Bank, $214 billion-asset First Citizens Bank and $221 billion-asset Citizens Bank would be covered.
Debt Rule, ‘Living Wills’
Under the long-term debt rule, a $100 billion-asset bank would need to have a minimum outstanding amount of eligible long-term debt of at least 6 percent of the bank’s total risk-weighted assets, 2.5 percent of its total leverage exposure and 3.5 percent of its average total consolidated assets. Covered banks will 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.
Long-term debt can be used to replenish a bank’s equity in the event of significant losses that deplete its equity capital. The regulators said that long-term debt could also enhance market discipline over excessive risk-taking and decrease the likelihood of a bank failing.
The FDIC board also pushed to require resolution plans or living wills for banks with more than $100 billion in assets, as well as new information and analysis filing requirements for banks with $50 billion to $100 billion in assets. The board voted against first requiring board approval for sales of mid-sized and large failed banks.
FDIC and the Fed also advanced the proposed agency guidance for resolution plan submissions 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 Pushes Back
FDIC Vice Chairman Travis Hill and board director Jonathan McKernan raised concerns that the rules might put covered banking institutions – large regional banks with assets between $100 billion and 200 billion such as M&T Bank and Citizens Bank – at a “competitive disadvantage” as it is subjected to the same stricter rules as imposed to megabanks with trillions in assets such as JP Morgan Chase and Bank of America.
“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.
Rob Nichols, ABA president and CEO, is also against the rule, noting that this is opposite to the banking industry mandate that regulations must be tailored based on a bank’s risk and business model.
“The new rules proposed by the FDIC expanding resolution planning rules for banks with as little as $50 billion in assets and imposing long-term debt requirements for banks with assets of $100 billion or more are another step in the wrong direction. Today’s FDIC actions, in most cases over dissenting votes, come on top of last month’s misguided capital proposal and run counter to the bipartisan law Congress passed requiring that regulations be tailored based on a bank’s risk and business model. 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 we are concerned with the proposed expansion of resolution planning and long-term debt requirements, we believe that the FDIC’s potential reforms to the process of selling certain failed banks could be a positive development. 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 added.
