A new rule was put forth by US banking regulators on Tuesday that would require large regional banks to issue around $70 billion in new debt as part of a larger effort to strengthen the sector’s resilience following the failure of three lenders earlier this year.
The idea which was put out by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency, would bring banks with assets of over $100 billion closer to the biggest Wall Street titans, which already have their own debt requirements.
In an effort to make the banking sector more resilient in the wake of the failure of three lenders earlier this year, American banking regulators proposed a new regulation on Tuesday that would compel large regional banks to issue around $70 billion in new debt.
The proposa which was made by the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC), would push banks with assets of more than $100 billion closer to the greatest Wall Street titans, who already have their own debt requirements.
According to the FDIC, the proposal would increase banks’ issuance of long-term debt by around 25%, or $70 billion, and is subject to industry comment. After the rule’s implementation, banks would have three years to comply with the new criteria, the agency stated.
If adopted, lenders will be required to issue loans in an environment where interest rates have risen quickly while also facing pressure from regulators to adopt a different, comprehensive proposal that would mandate that lenders considerably boost their capital.
Partner at Mayer Brown Matthew Bisanz remarked, “That will be a large amount that they will be asking investors to take on.” The cost of issuing this kind of debt will be higher.
The “COMPELLING CASE”
Depending on which amount is higher—risk-weighted assets, total assets, or total leverage—each bank’s debt need will be calculated.
The new, stricter regulations would apply to regional banks including Citizens Financial Group Inc., Fifth Third Bancorp, and PNC Financial Services Group Inc.
Industry organizations swiftly criticized the proposal.
Greg Baer CEO of the Bank Policy Institute, which advocates for large banks, stated that “the agencies must consider the complete picture and give a thorough accounting of the complete costs and benefits” of these ideas. There is a chance that these recommendations could weaken the institutions they are meant to strengthen if they are not given careful thought and calibration.
This month, Gruenberg gave a speech outlining the plans and argued that recent bank failures provided “a compelling case” for regulators to place stricter regulations on local businesses.
The so-called “living will” plans, which outline how banks must demonstrate how they could be safely wound down after collapsing, were also proposed for revision by regulators on Tuesday.
The idea would compel lenders to submit more thorough plans, including outlining how they may be broken up and sold off in chunks or managed permanently as bridge banks by the FDIC. It would also mandate that banks demonstrate how they can promptly give over vital information to regulators and potential buyers.
Due in part to difficulties in delivering thorough information to possible acquirers, the FDIC struggled to locate rapid purchasers for some failed lenders, such as Silicon Valley Bank.
In the case of First Republic Bank, the FDIC ultimately sold it to JPMorgan Chase, the largest bank in the country, drawing criticism from some opponents of big banks for allowing the Wall Street behemoth to expand even further.
Ian Katz, managing director of Capital Alpha Partners, stated in a note that it is obvious that the authorities want to prevent hurried, over-the-weekend bank sales that either require selling to an already-giant bank or taking a significant chunk out of the FDIC’s Deposit Insurance Fund.
