Gruenberg: Long term debt, uninsured deposit reform coming for big banks

Martin Gruenberg, chairman of the Federal Deposit Insurance Corp., said in a speech at the Brookings Institution Monday that Total Loss Absorbing Capacity requirements, living will adjustments and higher regulatory scrutiny of uninsured deposits are part of the agency’s next regulatory steps to address shortcomings that led to the failures of Silicon Valley Bank, Signature Bank and First Republic this spring.

Bloomberg News


WASHINGTON — Federal Deposit Insurance Corp. Chair Martin Gruenberg Monday previewed a number of new bank regulations the agencies plan to implement to prevent the industry turmoil seen in March of 2023.

He said to improve the likelihood of orderly resolving banks with over $100 billion in assets — a category that would include now-failed Silicon Valley Bank — without regulators resorting to a systemic risk exception, the agencies plan to propose rules requiring that banks capital holdings reflect unrealized losses on available-for-sale securities. 

He also said the agencies plan to subject firms this size to long-term debt requirements — known as Total Loss Absorbing Capacity, which the largest banks are required to hold — and compel them to provide more detailed resolution plans. He also said the agency will enhance its scrutiny over firms which have high concentrations of uninsured deposits, and may consider implementing a premium that prices-in the additional risks that firms pose when they have high levels of uninsured deposits.

“If we had had a buffer of unsecured debt for Silicon Valley Bank, if we had had a robust resolution plan and if Silicon Valley Bank had been required to hold capital ahead of those unrealized losses — you know, it’s hypothetical, but we could have had a different scenario,” said the FDIC official in his remarks at the Brookings Institution.

Gruenberg said the bank runs that depleted SVB’s liquidity were triggered when depositors caught wind that the bank was selling available-for-sale securities at a loss, indicating the bank was strapped for capital. He reiterated today the bank regulatory agencies’ are intent on making banks above the $100 billion threshold hold additional capital buffers which account for such unrealized losses, which could improve depositor confidence at banks this size. 

“Had Silicon Valley Bank been required to hold capital against the unrealized losses on its available-for-sale securities, as the proposed Basel III framework would require, the bank might have averted the loss of market confidence and the liquidity run,” said Gruenberg. 

Gruenberg also said the agencies will soon jointly propose a new long-term debt requirement for large regionals with over $100 billion in assets.

FDIC and the Fed previously jointly issued an advance notice of proposed rulemaking soliciting public comments on Resolution-Related Resource Requirements for Large Banking Organizations In October 2022. Gruenberg said that based on that feedback, the two agencies — joined by the Office of the Comptroller of the Currency — will soon act on that proposal.

He said they will likely propose banks with over $100 billion be required to issue long-term debt sufficient to recapitalize the bank in resolution, which will lower the incentive for uninsured depositors to run. The FDIC Chair also indicated this will likely require issuance of new debt by banks, over the span of an appropriate transition period. 

“Such [debt] absorbs losses before the depositor class — the FDIC and uninsured depositors — take losses,” he said. “Even if the institution fails, the buffer of long-term debt reduces cost to the Deposit Insurance Fund, and makes it more likely that a closing weekend sale could comply with the statutory least-cost test and avoid the need for a systemic risk exception. Further, it creates additional options in resolution, such as recapitalizing the failed bank under new ownership or breaking up the bank and selling portions of it to different acquirers, as an alternative to a merger with another large banking institution.”

It also forces the banks’ deposit base to be built in a way that accounts for risks, he said, since a bank selling long term debt to cover costs is less likely to spook uninsured depositors the way SVB sold its securities at losses in March did. Furthermore, he noted, investors in subordinated, long-term debt will have an incentive to keep banks’ risk appetite in check, since they can’t simply run when problems occur like uninsured depositors can and are the last to be repaid if the firm does ultimately fail. 

“This gives them a greater incentive to monitor risk in these banks and exert pressure on management to better manage risk,” he said.

One regulation Gruenberg wants to see entirely revamped are resolution planning requirements for large regional banks. Under the Federal Deposit Insurance Act, banks must file resolution plans that lay out contingency planning in the case of failure. He said the FDIC plans to issue a notice of proposed rulemaking for public comment in the near future that will comprehensively reevaluate the current rules on resolution planning.

“A stronger resolution planning requirements for large regional banks, combined with a long term debt requirement, would provide a much stronger foundation for the orderly resolution of these institutions,” said Gruenberg.”

He added that banks under $100 billion also present resolution challenges in some cases. While  he did not propose requiring full resolution plans for the smaller banks, he said FDIC will require banks over $50 billion to file certain information to inform resolution planning. This could have helped to avoid the issues FDIC faced in resolving Signature bank, which after a period of growth failed — according to the agency head — just months before it would have been required to file its first resolution plan this June.

Gruenberg also took time to highlight regulators’ ongoing concerns around the risks posed by firms which heavily rely on uninsured deposits. According to Gruenberg, this year’s bank failures showed that large uninsured depositors — such as businesses, nonprofit organizations and wealthy depositors — tend to be sophisticated and more attuned to market developments than retail depositors and more quick to run. This is troubling, he said, because a relatively small number of depositors constitute the majority of uninsured deposits, so runs can be swift and damaging. Interestingly, he noted that these effects are compounded by the speed of modern banking where instant withdrawals can swiftly couple with social media to drive digital bank runs.

In light of these risks, he said FDIC is looking to heighten supervision of firms with high uninsured deposits and even repricing deposit insurance premiums based on uninsured deposit concentrations at banks.

“FDIC examiner instructions could establish a specific threshold for concentrations of uninsured deposits, which would require examiners to devote supervisory attention to the concentration,” he said. “Risk based deposit insurance pricing can deter banks from relying too heavily on less stable sources of funding. Such as uninsured deposits, and can maintain fairness by charging banks with unstable funding sources for the risk they pose to the Deposit Insurance Fund.”

FDIC’s current chair FDIC veteran Marty Gruenberg has long advocated for restoring stronger regulation of larger banks — like for those with more roughly than $50 billion in assets. Such firms were previously considered global systemically important banks, or GSIBs, but were exempted from such categorization when a 2018 law raised the threshold for heightened requirements to banks with assets of $250 billion or more.

He previously gave a speech four years ago at the Brookings Institution in which he warned that the resolution of large regional banks posed an “underappreciated risk” to financial stability, foreboding many of the concerns he reiterated at Monday’s remarks.

“These are perhaps lessons we should have learned from the 2008 financial crisis,” Gruenberg said Monday. “This time if I may say, I don’t think we’re going to miss.”

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