Regional banks to be forced to raise debt in case of failure

Martin Gruenberg, Chair of the Federal Deposit Insurance Corporation (FDIC), testifies about recent bank failures during a US Senate Committee on Banking, House and Urban Affairs hearing on Capitol Hill in Washington, DC, May 18, 2023.

Saul Loeb | AFP | Getty Images

U.S. banking regulators on Tuesday unveiled plans to force regional banks to issue debt to protect depositors in the event of more failures.

All American banks with at least $100 billion in assets would be subject to the new requirement, which makes them hold a layer of long-term debt that would absorb losses in the event of a government seizure, according to a joint notice from the Treasury, Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corporation.

FDIC Chairman Marty Gruenberg telegraphed his intentions last month in a speech at the Brookings Institution. Broadly, the proposal takes measures that apply to the biggest institutions — known in the industry as global systemically important banks, or GSIBs — down to the level of banks with at least $100 billion in assets.

That includes steps to raise levels of long-term debt held by banks, removing a loophole that allows midsized banks to avoid the recognition of declines in bond holdings, and forcing banks to come up with more robust living wills, or resolution plans that would take effect in the event of a failure.

Gruenberg also said that regulators would look at updating their own guidance on monitoring risks including a high concentration of uninsured deposits, as well as changes to deposit insurance pricing to discourage risky behavior.

Analysts have focused on the debt requirements because that is the most impactful change for shareholders of regional banks. The point of raising debt levels is so that if regulators need to seize a midsized bank, there is a layer of capital ready to absorb losses before uninsured depositors are threatened, Gruenberg said in the Aug. 14 speech.

This story is developing. Please check back for updates.

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