FDIC set to unveil plan for stricter regional bank rules

First Republic Bank

29/08/2023 06:00

By Pete Schroeder
       WASHINGTON, Aug 29 (Reuters) - A top U.S. banking
regulator is set on Tuesday to propose heightened rules to
ensure regional banks can be safely dissolved in times of
stress.
    The Federal Deposit Insurance Corporation (FDIC) will vote
on five separate proposals at a meeting, all aimed at ensuring
banks with over $100 billion in assets are prepared for their
own potential failures, and can be taken apart smoothly and
quickly.
    The push comes in the aftermath of a tumultuous spring that
saw three larger banks fail, forcing regulators to scramble to
backstop depositors and tap billions of dollars from the FDIC's
insurance fund to sell off pieces of the firms to willing
buyers.
    Now, regulators are looking to toughen their rules,
particularly for regional banks like PNC Financial Services
Group Inc and Citizens Financial Group Inc.
    "The failure of three large regional banks this
spring...demonstrated clearly the risk to financial stability
that large regional banks can pose," said FDIC Chairman Martin
Gruenberg in a speech earlier this month previewing the
proposals. "It makes a compelling case for action by the federal
bank regulatory agencies to address the underlying
vulnerabilities that made the failure of these institutions
possible."
    Among proposals the FDIC is expect to advance is one that
would require firms of that size to issue more long-term debt,
similar to a requirement already in place for the largest global
banks. Requiring those firms to issue such debt could
simultaneously provide more funds to offset potential losses,
reassure depositors, and encourage investors to closely monitor
a bank's operations, Gruenberg argued.
    The regulator is also set to propose an overhaul to "living
will" rules for banks, which require firms to detail how they
could be safely taken apart after failing.
    Gruenberg said banks should give regulators more options for
how to deal with them in failure, such as which business lines
could be sold separately, as opposed to a clean acquisition by
another firm shortly after the defunct firms closed.
    As banks failed last spring, the FDIC was unable to find
immediate buyers for some firms, such as Silicon Valley Bank. 
And in the case of First Republic Bank, the FDIC ended up
selling it to JPMorgan Chase, 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," wrote Ian Katz, managing director of
Capital Alpha Partners, in a note.
    The banking industry is already pushing back against the
upcoming 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,” said Rob Nichols, head of
the American Bankers Association, in a statement in response to
Gruenberg's speech.

 (Reporting by Pete Schroeder; Editing by Megan Davies and
Andrea Ricci)
 ((Pete.Schroeder@thomsonreuters.com; 202-310-5485;))