Reuters, WASHINGTON, August 29 – As part of a larger initiative to strengthen the sector’s resilience following the failure of three lenders earlier this year, U.S. banking regulators on Tuesday proposed a new regulation that would require large regional banks to issue about $70 billion in new debt.
The idea, put out by the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC), would bring banks with assets of over $100 billion closer to the biggest Wall Street titans, which already have their own debt requirement.
It comes after a turbulent spring for local banks during which Silicon Valley Bank and two other institutions went under, forcing regulators to guarantee deposits to avert a larger panic.
Martin Gruenberg, the chairman of the FDIC, stated that the crisis demonstrated the need for stronger regulations for smaller banks and that making them issue more long-term debt would increase the safety net for losses, comfort depositors, and motivate investors to carefully examine bank operations.
According to the FDIC, the proposal would increase banks’ issuance of long-term debt by around 25%, or $70 billion, and is subject to industry comment. After the rule’s implementation, banks would have three years to comply with the new criteria, the agency stated.
If adopted, lenders will be required to issue loans in an environment where interest rates have risen quickly while also facing pressure from regulators to adopt a different, comprehensive proposal that would mandate that lenders considerably boost their capital.
Depending on which figure is greatest, each bank’s debt need will be determined by its risk-weighted assets, total assets, or total leverage.
Regional banks that would be subject to the new, stricter regulations include PNC Financial Services Group Inc. (PNC.N), Fifth Third Bancorp. (FITB.O), and Citizens Financial Group Inc. (CFG.N).
Industry organisations criticised the proposal right away.
Greg Baer, CEO of the Bank Policy Institute, which advocates for large banks, stated that “the agencies must consider the complete picture and give a thorough accounting of the complete costs and benefits” of these ideas. There is a chance that these recommendations could weaken the institutions they are meant to strengthen if they are not given careful thought and calibration.
This month, Gruenberg gave a speech outlining the plans and argued that recent bank failures provided “a compelling case” for regulators to place stricter regulations on local businesses.
The so-called “living will” plans, which outline how banks must demonstrate how they could be safely wound down after collapsing, were also proposed for revision by regulators on Tuesday.
According to the idea, lenders would have to submit more thorough plans, including explanations of how they may be split up and sold off in chunks or managed permanently as bridge banks by the FDIC. They would also have to guarantee that banks can swiftly provide regulators and potential buyers with vital information.
Due in part to difficulties in delivering thorough information to possible acquirers, the FDIC was unable to locate rapid buyers for several failed lenders, such as Silicon Valley Bank.
The FDIC ultimately sold First Republic Bank to JPMorgan Chase (JPM.N), the biggest bank in the country, which drew criticism from some opponents of big banks for allowing the Wall Street behemoth to expand even further.
According to Ian Katz, managing director of Capital Alpha Partners, “it’s clear that the regulators want to avoid rushed, over-the-weekend bank sales that either take a significant chunk out of the FDIC’s Deposit Insurance Fund or require selling to an already-giant bank.”
Editing by Megan Davies, Philippa Fletcher, and Andrea Ricci; reporting by Pete Schroeder