© Reuters. FILE PHOTO: Federal Deposit Insurance Corporation Chairman Martin Gruenberg testifies at a House Financial Services Committee hearing on the response to the recent bank failures of Silicon Valley Bank and Signature Bank, on Capitol Hill in Washington, U.S
By Pete Schroeder
WASHINGTON (Reuters) -Top U.S. banking regulators on Tuesday unveiled another slate of proposed rules to toughen oversight of big banks, this time focusing on new requirements for large regional lenders to ensure they could safely fail without threatening the overall system.
The plans, unveiled by the Federal Deposit Insurance Corporation (FDIC), includes a new requirement that banks with over $100 billion in assets must issue billions more in long-term debt, which could serve as a cushion against losses should firms fail, protecting depositors and taxpayer-funded insurance.
The new requirement would bring large regional banks more in line with the largest global banks, which already have their own debt requirement. The proposal follows a tumultuous spring for regional banks, which saw three collapse, forcing regulators to backstop deposits to stave off a broader panic.
FDIC Chairman Martin Gruenberg argued the crisis showed smaller banks should also be made more resilient, and that requiring them to issue more long-term debt would provide an added cushion for losses, reassure depositors, and encourage investors to closely scrutinize banks’ operations.
The proposal would mean banks have to raise their long-term debt issuance by roughly 25%, or $70 billion, according to the FDIC. The agency said firms would have three years from the rule’s adoption to meet the new standard.
But if approved, the requirement would force banks to go to market with debt in an environment where interest rates have rapidly risen. That requirement comes as regulators are simultaneously pushing a separate, sweeping proposal that could drastically raise capital requirements for large banks as part of a broader effort to bolster the sector.
“These banks will have to go into the market issuing capital to meet the capital proposal and then issuing long-term debt to meet the long-term debt proposal,” said Matthew Bisanz, a partner at Mayer Brown. “That will be a large amount that they will be asking investors to take on.”
Specifically, the level required of each bank will be based on percentages of each firm’s risk-weighted assets, total assets, or total leverage, depending on what yields the highest number.
Regional banks like PNC Financial Services Group Inc (NYSE:), Fifth Third Bancorp (NASDAQ:), and Citizens Financial (NYSE:) Group Inc are among those that would fall under the new, tougher rules.
In a speech previewing the proposals earlier this month, Gruenberg said the spring’s events made “a compelling case” for regulators to impose tougher rules on regional firms.
Also on Tuesday, the FDIC rolled out a proposed overhaul to its rules on how banks must show how they could be safely taken apart after failing.
The proposal would require firms to submit more detailed plans, including showing how they could be operated indefinitely as bridge banks by the FDIC after failing, and ensuring firms can quickly hand over key data to regulators and prospective buyers after a failure.
As banks failed last spring, the FDIC was unable to find immediate buyers for some firms, such as Silicon Valley Bank, in part due to struggles providing comprehensive data to potential acquirers in the immediate aftermath.
In the case of First Republic Bank (OTC:), the FDIC ended up selling it to JPMorgan Chase (NYSE:), the nation’s largest firm, leading to rebukes from some big bank critics about allowing the Wall Street giant to grow even larger.
“Based on the spring banking turmoil and Gruenberg’s speech, it’s clear that the regulators want to avoid rushed, over-the-weekend bank sales that either take a big chunk out of the FDIC’s Deposit Insurance Fund or require selling to an already-giant bank,” Ian Katz, managing director of Capital Alpha Partners, wrote in a note.
The proposed rules were approved by the FDIC at a meeting Tuesday, giving the industry the opportunity to critique the approach. Two other regulators, the Office of the Comptroller of the Currency and the Federal Reserve, are expected to follow suit.
The banking industry is already pushing back against the proposal and similar efforts, calling them unjustified and economically harmful.
“The FDIC and other regulators must demonstrate that all of these proposed changes…are justified by evidence and outweigh the significant costs to our economy,” Rob Nichols, head of the American Bankers Association, said in a statement in response to Gruenberg’s speech.
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