The Federal Deposit Insurance Corp. has issued proposals that would make banks with $100 billion of assets or more hold more long-term debt as a cost buffer in the event of a collapse, and add new planning requirements in case they ever have to be resolved in an emergency.

“The incremental long-term debt required under the proposal would marginally increase funding costs and may result in a decline of net interest margins of about three basis points,” FDIC Chairman Martin Gruenberg said. However, it would lower the risk of hikes in deposit insurance premiums, he argued.

Al Drago/Bloomberg

WASHINGTON — The Federal Deposit Insurance Corp. approved two proposals that would make larger banks hold more long-term debt as a financial buffer in the event of a collapse and would toughen requirements for their living wills if they have to be unwound.

The agency also issued guidance on enhancing crisis-resolution planning for large foreign and domestic financial institutions that aren’t global systemically important banks, as well as formal procedures for approving failed-bank acquisitions.

Industry trade groups that represent larger banks criticized some or all of the moves as potentially harmful or excessive, but smaller banks said they would properly shift regulatory burden to riskier, more complex players.

The long-term debt plan would require banks with assets of $100 billion or more to hold minimum eligible outstanding long-term debt equal to the greater of 6% of their risk-weighted assets, 2.5% of total leverage exposure, or 3.5% of average total consolidated assets.

FDIC Chairman Martin Gruenberg said that even if a bank fails, the long term-debt would cushion the blow to uninsured depositors, reduce the resolution costs sustained by the Deposit Insurance Fund and offer the agency additional resolution options other than merging a failed firm with another large institution. He also said the plan could reduce the odds of bank runs. 

The speed at which depositors fled Silicon Valley Bank in March left regulators holding remnants of a bank with diminishing value, as well as little time to find attractive acquisition offers. This led them — in consultation with the Treasury Department — to forgo least-cost resolution, or the statutory requirement that they resolve banks in the manner least costly to the DIF. The FDIC is statutorily required to recoup DIF losses by imposing special deposit-insurance assessments on banks.

Gruenberg said while the long-term debt proposal would shrink banks’ net interest margins, it could help prevent the kind of instability banks saw in March and minimize hikes in assessment fees.

“The incremental long-term debt required under the proposal would marginally increase funding costs, and may result in a decline of net interest margins of about three basis points,” he said at the board meeting. “[Costs to the Deposit Insurance Fund] — a major portion of which would have been borne by long term-debt holders if this proposal had been in place — will instead be passed on to the banking industry through assessments” in similar crises in the future if the plan isn’t finalized.

The Federal Reserve separately approved a similar measure Tuesday. However, Fed Govs. Michelle Bowman and Christopher Waller raised issues with requiring larger banks to hold long-term debt. They argued that the plan could be too onerous for certain banks but voted in favor of taking it the public-comment phase.

The FDIC issued another proposed rule that officials said would require banks with assets of $100 billion or more to better plan for their potential failure in a way that lessens the likelihood of a rushed over-a-weekend sale.

Gruenberg said the proposed reporting would streamline the FDIC’s ability to set up a bridge bank when banks fail, and facilitate the swift availability of key data for potential acquirers and the FDIC as receiver.

“It would require the bank to explain how it could be placed into a bridge depository institution, how operations could continue while separating itself from its parent and affiliates and the actions that would be needed to stabilize a bridge depository institution among other options,” he said.

Banks with more than $100 billion of assets would be required to submit such enhanced resolution plans every two years, with a limited interim supplemental filing in the off years. Firms between $50 billion and $100 billion of assets would have to submit less-stringent “informational filings” on the same timetables.

Meanwhile, the FDIC, along with the Fed, issued proposed guidance to enhance resolution plans for domestic banks and foreign banks with U.S. branches with assets of between $250 billion and $700 billion. This FDIC said work on such guidance — applicable to large regional non-global systemically important banks — predated this year’s failures but that such events heightened the agency’s interest in updating guidance for large regional bank resolutions.

The FDIC board also issued new procedures to formalize its process to consider potential acquirers’ offers for failed banks over $50 billion over assets in FDIC receivership. The process would require each FDIC board member to be provided with information on the marketing process, including potential qualified bidders, any bids received and the least-costly transaction. Gruenberg indicated the procedure would essentially give a consensus majority of the board the ability to subject potential acquisitions to a formal vote.

“If the least-cost resolution involves acquisition by another insured depository institution, the relevant division director would be required to consult with each board member as to whether a board vote should be held on the approval of the proposed acquisition of the failed bank by the acquiring bank,” Gruenberg said. “If a majority of the board were to indicate that a vote should be held, then the acquisition would not proceed until approved by the board. If a majority of the board members do not indicate that a vote should be held, the acquisition would proceed.”

Two banking trade groups panned some or all of the proposals shortly after the board meeting. 

The Bank Policy Institute said in a news release the FDIC was proposing onerous and unnecessary requirements that unfairly coincide with forthcoming capital hikes on the same category of banks.

“The agencies must consider the complete picture — and give a thorough accounting of the complete costs and benefits — of these proposals,” BPI President and CEO Greg Baer said.

Rob Nichols, president of the American Bankers Association, said in a news release that while the FDIC’s updates to the receivership process were promising, it had concerns with the long-term debt and resolution-planning proposals.

“We will advocate strongly to ensure that regulators understand the harm that these overly broad rules would impose on customers, communities and the banks that serve them,” Nichols said.

However, the Independent Community Bankers of America — which represents small banks — applauded the proposal, saying it would adequately impose costs on larger banks commensurate with the systemic risks they pose.

“As ICBA has long said, applying stricter capital, debt, and resolution standards on the largest banks will reduce risks to the Deposit Insurance Fund and help address the nation’s ‘too big to fail’ problem while allowing community banks to continue meeting the needs of local customers and communities,” ICBA President and CEO Rebeca Romero Rainey said.

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