FDIC unveils plan to ramp up debt, resolution requirements for big US banks (updated)

First Republic Bank

29/08/2023 15:42

(Updated to include details from FDIC proposals)
    By Pete Schroeder
       WASHINGTON, Aug 29 (Reuters) - A top U.S. banking
regulator Tuesday unveiled a slate of proposed rules to ensure
regional banks can be safely dissolved in times of stress,
including one that requires them to issue billions more in debt
as a cushion against potential losses.
    The Federal Deposit Insurance Corporation (FDIC) was set to
vote on five proposals later in the day 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.
    Among the proposals laid out by FDIC staff is one that will
require banks of that size to issue more long-term debt, which
could provide more funds to offset potential losses, reassure
depositors, and encourage investors to closely monitor a bank's
operations, according to FDIC Chairman Martin Gruenberg.
    That 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.
    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, Fifth
Third Bancorp, and Citizens Financial Group Inc are among those
that would fall under the new, tougher rules.
    The push comes in the aftermath of a tumultuous spring that
saw three 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.
    "The failure of three large regional banks this
spring...demonstrated clearly the risk to financial stability
that large regional banks can pose," Gruenberg said 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."
    The regulator also rolled out a proposed overhaul to its
rules on how banks must show regulators 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, 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," Ian Katz, managing director of Capital
Alpha Partners, wrote in a note.
    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.

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