Federal regulators plan to require regional banks to issue more long-term debt as part of their living wills. The proposal is being met with support from the Independent Community Bankers of America and opposition from the American Bankers Association.
The proposal, issued Aug. 29 by the FDIC, Federal Reserve Board of Governors and Office of the Comptroller of the Currency, would require banks with at least $100 billion in assets to have a minimum amount of eligible long-term debt — 6 percent of total risk-weighted assets or 3.5 percent of average total assets, whichever is greater — to absorb losses in the event of a failure.
According to the FDIC, the proposal would grant it greater flexibility to either transfer deposit liabilities to an acquirer, or utilize a bridge depository institution to provide additional time to find a resolution. The proposal was introduced months after the failures of three large regional banks, including California-based Silicon Valley Bank and First Republic Bank and New York-based Signature Bank. The FDIC attributed the failures to bank runs caused by the institutions lacking alternative funding sources to equity and deposits.
“Reducing the risk of loss to uninsured depositors will mitigate financial stability and contagion risks and may decrease the likelihood and speed of deposit withdrawals by uninsured depositors in the event of stress,” the FDIC stated.
To the ICBA, requiring large regional banks to maintain a minimum amount of long-term debt and total loss-absorbing capacity will reduce the odds of a bank failure destabilizing the financial system. “The failures this year of Silicon Valley Bank and Signature Bank of New York demonstrate that large banks over $100 billion should be required to maintain long-term debt with characteristics similar to those required for global systemically important banking organizations,” said President and CEO Rebeca Romero Rainey.
The proposed requirements came roughly a month after the Federal Reserve, OCC and FDIC proposed a separate overhaul of bank capital rules. Under the plan announced July 27, bank holding companies with more than $100 billion in assets would need to set aside 16 percent more capital to protect against unrealized losses. The changes are expected to be phased in over three years. The final rule is expected to be effective July 1, 2025, with it taking full effect during the second half of 2028.
“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,” said ABA President and CEO Rob Nichols. “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.”
The majority of bank executives are concerned that any increase in capital requirements for banks with more than $100 billion in assets will trickle down to smaller institutions, according to an IntraFi survey of bank CEOs, presidents, CFOs and chief operating officers from 545 U.S. banks. Thirty-nine percent said raising capital requirements on larger institutions was appropriate, while 19 percent believed there was no need to do so.
Requiring banks to borrow more funds to secure cash will initially lower the capital ratios, noted United Bankers’ Bank President and CEO Dwight Larsen. “This will have to be managed by lowering dividend payouts — which hurts your stock price — reducing stock repurchases, or selling stock to get more capital,” he noted.
Larsen has several other unanswered questions about the proposal, including what will be the average duration of the long-term debt banks will need to hold; and if there will be minimum asset requirements to measure short-term liquidity.
Public comments on the proposal will be accepted through the end of November.