Regulators on Tuesday unveiled a proposal that would require banks with more than $100 billion in assets to issue more long-term debt, a measure the agencies said would help regionals safely wind down in the event of a bank failure.
Under the proposal, which the five-member Federal Deposit Insurance Corp. board passed unanimously on Tuesday, large banks would be required to maintain a minimum amount of eligible long-term debt equal to 3.5% of average total assets or 6% of risk weighted assets, whichever is higher.
Banks would have three years from the new rule's adoption to meet the new standard, the FDIC said.
Large banks have recently maintained roughly 75% of the required amount of long-term debt outlined in the proposal, according to the FDIC’s estimates.
The proposal was one of several measures the FDIC board passed on Tuesday, all of which were aimed at strengthening the resolution plans of large lenders in the aftermath of several bank failures in March.
Regulators also proposed a rule that would require banks with over $50 billion in total assets to periodically submit plans to the FDIC that demonstrate how they could operate as bridge banks and be resolved in the event of a failure.
The FDIC board passed the proposal 3-2, with board members Travis Hill and Jonathan McKernan voting against the measure.
Currently, there are 45 insured depository institutions with at least $50 billion in total assets and 31 over $100 billion, according to the FDIC. As a group, the firms represent approximately $13.8 trillion in total deposits, the regulator said.
FDIC Chair Martin Gruenberg previewed the new proposals during a speech at the Brookings Institution earlier this month, where he said the March failures of Silicon Valley Bank and Signature Bank “demonstrate clearly the risk that large regional banks can pose.”
"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,” he said.
During Tuesday’s board meeting, Gruenberg said the “relatively modest estimated compliance costs” associated with the proposed long-term debt requirement should be considered in the context of the potential benefits that may result from the new rule.
“The FDIC estimates total losses to the Deposit Insurance Fund of over $30 billion from the recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank associated with coverage of insured deposits at all three banks and uninsured deposits at Silicon Valley and Signature Bank,” he said.
Gruenberg said a major portion of those costs would have been borne by long-term debt holders if the proposal had been in place, instead of being passed on to the banking industry through assessments.
“This long-term debt requirement could also have made a wider range of resolution strategies and transactions available to the FDIC, which would have further reduced losses, potentially avoiding the necessity of a systemic risk exception, and possibly avoiding the costs that resulted from these failures altogether,” he said.
