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U.S. bank regulators hope to make emergency sell-offs at large regional lenders a thing of the past by requiring lenders to produce “living wills,” which would make it easier to shut down struggling institutions.
Banks with more than $100 billion in assets will be required to submit more detailed resolution plans and be asked to raise new unsecured debt that can be used to capitalize failing banks, FDIC Chairman Martin Grunberg said on Monday. reorganization.
The regulator is responding to the failures of Silicon Valley Bank, Signature Bank and First Republic Bank this spring, which were all seized, closed and sold to larger lenders, resulting in huge losses for the FDIC’s deposit insurance fund.
The previous two crashes destabilized the broader U.S. banking system, leading to a flight of deposits and a drop in share prices for mid-sized banks. US regulators were also forced to declare the failure of SVB and Signature a “systemic risk”, allowing them to guarantee deposits above the normal $250,000 deposit insurance limit.
In a speech at the Brookings Institution, Grunberg said the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency plan to make formal proposals “in the near future.”
“The proposed rules would require banks to offer strategies that do not rely on weekend sales,” he said, referring to the regulator’s practice of taking over banks when markets are closed.
Lenders will be asked to explain how they will be placed in a bridging bank (a temporary entity that runs a failed bank while a buyer is found), and how it will continue to operate while it is separated from the parent company, he said.
Grunberg said the plans would make it easier to break up failed banks and sell parts of them. That may help avoid a repeat of the First Republic, when it sold its assets and deposits to JPMorgan Chase & Co, the largest U.S. bank, drawing criticism for increasing banking concentration.
After the 2008 financial crisis, regulators around the world began requiring global systemic banks to submit detailed living wills, but smaller U.S. banks did not face the same requirement.
“Those are perhaps the lessons we should learn from the 2008 financial crisis. The events earlier this year gave us another opportunity. This time I don’t think we’ll miss it,” Grunberg said.
Following the comments, shares of large regional banks Truist, PNC and US Bank closed down 3.7%, 2% and 1.9%, respectively.
In addition to the new rules on resolution plans, the FDIC and other regulators will move forward with a proposed rule that would require large regional banks — with $100 billion or more in assets — to raise additional debt, Grunberg said. Covering losses provides additional support in the event of a failure.
The proposal follows a similar proposal in October targeting large banks with at least $250 billion in assets.
Grunberg said on Monday that the regional banking crisis made it clear that debt requirements should also include regional lenders. The proposal, which would increase costs for regional banks, comes at a time when banks are already battling savers demanding higher rates.
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