FDIC to enforce stricter capital rules on regional banks.

Federal regulators have proposed new​ regulations that would‍ impose higher capital requirements on regional banks.

The ​Federal Deposit Insurance Corporation (FDIC) is taking action to prevent another banking crisis like the ⁢one that occurred earlier this year when four mid-sized lenders failed.

The smaller banks will be required to issue debt and establish “living wills” to protect the public in case of‌ future failures, according to an FDIC press release on Aug 29.

This measure would make ‍it easier‍ for the FDIC to unwind the operations of these banks in the future.

Regional Lenders Ordered⁤ to Raise ⁢Capital Debt Cushion

Smaller lenders will now be required to‍ hold at ⁣least $100 billion in assets to issue enough long-term debt and absorb losses in case of ⁤a potential government‍ seizure.​ This joint notice from ​the Treasury Department, Office of the Comptroller of the Currency, the Federal ⁤Reserve, and the FDIC outlines the new requirements.

Impacted banks will also have to maintain long-term debt levels equal​ to⁤ 3.5 percent of average total assets or 6 percent of risk-weighted assets, whichever is higher.

According ‍to Michael J. Hsu, ⁤acting U.S. comptroller of​ the currency, regional lenders lack the necessary long-term debt⁤ and prepared data rooms that larger banks have. This left the government with limited options to prevent financial ​chaos when Silicon Valley Bank, Signature Bank, and First Republic failed.

Mr. Hsu‍ is calling for long-term debt and separability/data ⁤room requirements to be extended to all banks with $100 billion or more in assets. This‌ would have made their failures less chaotic if they had​ enough capital that was separable.

He⁣ believes that loss-absorbing capital and long-term debt requirements would have ensured that the majority of losses were borne by the⁤ bank’s investors, rather than the‌ FDIC’s deposit insurance fund. This would have‌ facilitated ‌a quick and systematic breakup, minimizing uncertainty for the entire banking sector.

Regulators Aim to Prevent Future Bank Failures

These proposed changes were drafted after the FDIC pledged in March⁤ to cover all uninsured depositors ‌at Silicon Valley Bank and Signature Bank, as their collapse posed significant risks to the​ U.S. financial system.

First ‍Republic Bank, another regional lender, was sold to JPMorgan Chase ​following​ its seizure in May.

These actions by the FDIC are estimated to cost its⁤ Deposit Insurance Fund over $30 billion.

The nation’s largest banks will absorb ‍these costs through special assessments paid to the FDIC.

The regional banking crisis‌ also affected the earnings of other lenders, as depositors withdrew their ⁤funds in the first quarter.

Regulators‍ released their first outline⁤ of expected changes last month, proposing to raise capital requirements for banks with $100 billion or more‌ in assets ​and standardize risk models for the industry⁤ to avoid further disasters.

The larger financial institutions may have to raise ‌capital by as much ‍as 19 percent, while smaller banks with $100–250 million in assets would see an average increase of 5 percent.

Regulators are accepting comments on these proposals until the end ‌of November, following criticism from​ the industry after the rules ​were published in late‍ July.

Banking Industry Protests ​Proposed Rule Changes

FDIC Chair Martin Gruenberg stated that the‍ new ‍requirements would ​”marginally increase funding costs” and could reduce ​a key measure of bank ‌profitability by approximately three basis points.

Mr. Gruenberg emphasized ⁤the need for meaningful⁢ action to improve the likelihood⁢ of an orderly resolution​ of large⁣ banks, citing the experience of the three ⁢large bank ‌failures earlier this year. He noted that these banks had‍ disproportionately large amounts of uninsured deposits, which contributed significantly​ to their failures.

However, adding more long-term debt to regional bank⁢ balance sheets may create additional pressure for the industry, especially after the⁤ downgrades of dozens of lenders ‍by credit ratings agencies this year.

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