On Tuesday, regulators in the States released a fact sheet outlining plans to impose debt-issuing obligations and strengthen living wills of regional banks with assets of at least $100 billion. This is similar to the regulations that apply to larger banks. The affected establishments will need to possess long-term debt of at least 3.5% of their average total assets or 6% of their risk-weighted assets, depending on whichever coefficient is bigger.
On Tuesday, regulators in the United States published plans requiring regional banks with at least $100 billion in assets to issue long-term debt to increase their "living wills" in order to guard the public against future failures.The draft regulations from the Treasury Department, Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp.dictates that the affected lenders must sustain a level of long-term debt that corresponds to 3.5% of their total assets or 6% of their risk-weighted assets, whichever is greater.The FDIC's Tuesday fact sheet stated that banks are recommended not to hold debt from other banks to decrease the potential of contagion. These steps form part of the regulators' response to the regional banking crisis in March that caused the bankruptcy of three institutions and left many others with diminished profits. Last July, the agencies put forth their initial set of modifications, a broad collection of proposals geared at raising capital requirements and standardizing risk models.
The agencies conceded the requirements would cause "moderately higher funding costs" for regional banks, which could add to the industry's financial strain after the three major credit rating agencies downgraded the ratings of certain lenders this year. Nevertheless, banks shall have a three-year time period to comply with the new rule when it is put in place, and many institutions already possess suitable forms of debt, per the regulators. As a ballpark figure, the regulators estimated around 75% of the must-have debt is already held by regional banks. The KBW Regional Banking Index, which has taken a nosedive this year, rose slightly less than 1%. This comes as no surprise since FDIC Chairman Martin Gruenberg hinted at the changes during a speech at the Brookings Institution a few weeks ago.
This proposal extends measures to banks ranging from global systemically important banks (GSIBs) to those with assets of at least $100 billion. This comes after the sudden collapse of Silicon Valley Bank in March that caused alarm among customers, regulators, and executives, in terms of risks in the banking system. Such steps include the increase of long-term debt by banks, the closure of a loophole that allowed midsize banks to ignore declining bond values, and the creation of better-equipped living wills, or resolution plans in case of failure. Regulators are also examining updating the guidance on risk monitoring, such as high levels of uninsured deposits, as well as changes to deposit insurance pricing to discourage dubious behavior. This year, all three banks seized by the authorities had sizable amounts of uninsured deposits, which was an integral factor behind their failure.
Analysts have dedicated their attention to increasing debt levels, as this is the most substantial change for bank shareholders. Gruenberg clarified that by raising debt, it serves as a guard against insolvency and protects uninsured depositors in the event of a midsized bank collapse. Morgan Stanley analysts, led by Manan Gosalia, also mentioned that the lender will be forced to raise corporate bonds and replace existing funding with more expensive debt, which will further reduce profitability for midsized banks already dealing with rising funding costs. This could possibly damage yearly earnings by up to 3.5%, Gosalia added. Five banks, specifically Regions, M&T Bank, Citizens Financial, Northern Trust and Fifth Third Bancorp, are expected to raise a total of $12 billion in new debt, though their spokespeople have not yet commented.
Gruenberg, this month, suggested that having long-term debt in place should ease concerns for depositors during times of crisis, as well as lowering costs to the FDIC's Deposit Insurance Fund. He also posited that this could give regulators more options in the case of a bank weekend auction, such as replacing ownership or breaking up the bank to sell its component parts, rather than relying on excess powers for systemic risks. In addition, he said that the new proposal would likely require the issuance of new long-term debt, which would not be a source of liquidity pressure due to its length and investors' knowledge they won't be able to withdraw should problems arise. Further, the publicly traded instruments would signal the market's view of risk in these banks and increase investors' incentive to monitor lenders. Comments on the proposals are being accepted until the end of November, following the outcry from trade groups when parts of the plans were released in July.
FDIC Chairman Martin Gruenberg delivered a speech in August at the Brookings Institution. An earlier version incorrectly indicated the month.
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