The Bank Slate


Regulators propose debt rules for large U.S. banks

Federal bank regulators want regional banks to hold more debt and update their resolution plans.

U.S. banks with at least $100 billion of assets would be required to hold enough long-term debt to absorb losses should they fail, according to a notice of proposed rulemaking from the Treasury Department, Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp.

Large banks would be required to maintain long-term debt equal to the higher of 3.5% of average total assets or 6% of risk-weighted assets. They would be discouraged from holding other lenders’ debt.

The proposed rule comes less than two months after regulators release a series of proposals designed to standardize risk models and increase capital requirements.

While the requirements could create “moderately higher funding costs” for large banks, the agencies would give affected institutions three years to comply. Regulators estimated that large banks already have roughly three-fourths of the required debt.

The agencies issued a separate notice of proposed rulemaking tied to resolution plans. It would create two bank tiers, requiring those with more than $100 billion of assets to submit full plans and those with $50 billion to $100 billion to submit informational filings.

The proposal would establish a two-prong standard by which resolution submissions will be assessed and adjust the frequency of submissions to a two-year cycle. Banks are currently required to file every three years.

The FDIC also issued new procedures for its process of considering bidders’ offers for failed banks with more than $50 billion of assets.

The agency will require that each of its board members receive information on the marketing process. That will include potential qualified bidders, all bids received and the least costly transaction.

The nation’s biggest bank associations had divergent views of the proposals.

March’s failures “demonstrate that large banks over $100 billion should be required to maintain long-term debt with characteristics similar to those required for global systemically important banking organizations,” Rebeca Romero Rainey, president and CEO of the Independent Community Bankers of America, said in a statement.

“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,” she added.

The new rules “are another step in the wrong direction,” Rob Nichols, president and CEO of the American Bankers Association, said in a statement.

“Today’s FDIC actions, in most cases over dissenting votes, come on top of last month’s misguided capital proposal and run counter to the bipartisan law Congress passed requiring that regulations be tailored based on a bank’s risk and business model,” Nichols added. “We will advocate strongly to ensure that regulators understand the harm that these overly broad rules would impose.”

Nichols, however, expressed support for a proposal that would reform how the FDIC sells failed banks.

Allowing a wider range of bidders “could potentially result in more price competition without diluting the appropriate safeguards on who can own a bank,” Nichols said.

Comments on both proposals are due by Nov. 30.

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