The Federal Deposit Insurance Corp. proposed new regulations on regional banks Tuesday in the wake of several regional bank failures, including Silicon Valley Bank, earlier this year.
The new rules would require banks with more than $100 billion in assets to fund themselves more with long-term debt, a less-volatile source of funding than consumer deposits or short-term debt, and would also require banks with more than $50 billion in assets to periodically submit plans that would guide federal agencies in the case of a failure.
The long-term debt rule would apply to large banks, but would not be as strict as the capital requirements that impact the eight largest U.S. institutions, which the government has deemed to be “globally systemic banks,” or G-SIBSs.
Banks with more than $100 billion in assets, but which are not G-SIBs, would under the new rules be required to maintain a minimum amount of eligible long-term debt equal to the greater of 6% of risk-weighted assets, 3.5% of average total consolidated assets, and for banks subject to the supplementary leverage ratio, 2.5% of total leverage exposure under the supplementary leverage ratio.
“It’s clear that regulators want to avoid rushed, over-the-weekend bank sales that either take a big chunk out of the FDIC’s deposit insurance fund or require selling to an already-giant bank,” wrote Ian Katz, a financial industry analyst at Capital Alpha Partners, in a Monday note to clients.
The proposed regulations are in line with what FDIC Chairman Martin Gruenberg proposed in a speech earlier this month at the Brookings Institution.
The failures of SVB and Signature Bank of New York, and the need for federal regulators to bail out uninsured depositors at those institutions, “demonstrate clearly the risk that large regional banks can pose,” he said at the time.
The stress in the regional bank sector “makes a compelling case for action by the federal bank regulatory agencies to address the underlying vulnerabilities that made the failure of these institutions possible,” he added.
Regional bank stocks have recovered somewhat in recent months, but remain depressed, with the SPDR S&P Regional Banking ETF KRE down nearly 30% year-to-date, according to FactSet.