US officials unveiled their latest response to this year’s bank turmoil with proposals to boost oversight of midsize lenders and require them to prepare better for potential failures.
(Bloomberg) — US officials unveiled their latest response to this year’s bank turmoil with proposals to boost oversight of midsize lenders and require them to prepare better for potential failures.
The plans from the Federal Deposit Insurance Corp. and the Federal Reserve aren’t a sign of new stresses in the sector, but are instead an attempt to ensure that lenders can be dissolved smoothly and quickly following any collapse.
Both regulators homed in on hypothetical resolution plans, known as living wills. The Fed’s proposal would bolster such plans for bank holding companies and foreign banking firms with more than $250 billion in assets. The FDIC’s would mandate living wills for banks with $100 billion or more in assets.
The regulators also proposed Tuesday that banks with as little as $100 billion in assets be required to issue enough long-term debt to cover capital losses in times of severe stress.
The long-term debt mandates would be phased in over three years. But there was some relief: The new plan wouldn’t result in total loss-absorbing capacity requirements, known as TLAC, for large banks that aren’t the biggest and most complex.
The draft rules appear “less onerous” than anticipated for affected banks such as U.S. Bancorp and PNC Bank, Bloomberg Intelligence analysts Herman Chan and Sergio Ferreira wrote.
But Greg Baer, head of the Washington-based Bank Policy Institute, said the FDIC must survey “the full picture” of costs and benefits when it comes to midsize lenders’ compliance.
“These proposals attempt to fit regional and midsize banks into a regulatory mold designed for the largest globally active banks, a weakening of the bipartisan tailoring framework enacted by Congress,” Baer said.
Bank Collapses
The rapid failures of Silicon Valley Bank and Signature Bank in March spotlighted hurdles in oversight for midsize lenders. The plans would bring oversight more in line with the scrutiny of Wall Street’s largest lenders.
Since March, regulators have proposed a suite of plans to increase scrutiny. The issue of who should shoulder the costs for bank failures has become particularly contentious.
US officials’ decision to declare a “systemic-risk exception” and cover all deposits at SVB and Signature cost the government’s bedrock Deposit Insurance Fund billions of dollars. The fund is typically used to cover as much as $250,000 in an account, but the decision to backstop uninsured deposits means that big banks will now have to pay back much of that in fresh fees.
A buffer of long-term debt like the one proposed Tuesday would help protect the fund by avoiding the need for a systemic-risk exception, FDIC Chairman Martin Gruenberg said earlier this month.
(Updates with Fed plan, industry comment starting in third paragraph.)
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