Regional banks are facing a hit from the new debt level requirements

  • US banking regulators have revealed plans to force regional banks to issue debt to protect depositors in the event of further failures.
  • All US banks with assets of at least $100 billion will be subject to the new requirement.
  • The moves were widely expected after the sudden collapse of the Silicon Valley bank in March.

Martin Gruenberg, Chairman of the Federal Deposit Insurance Corporation (FDIC), testifies about recent bank failures during a hearing of the US Senate and House Committee on Banking and Urban Affairs on Capitol Hill in Washington, DC, on May 18, 2023.

Saul Loeb | AFP | Getty Images

US banking regulators revealed on Tuesday plans To force regional banks to issue debt to protect depositors in the event of further failures.

US banks with assets of at least $100 billion will be subject to the new condition, making them maintain a layer of long-term debt to absorb losses in the event of a government takeover, according to a joint study. notice From the Treasury Department, the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corporation.

Affected lenders will have to maintain long-term debt levels equal to 3.5% of average total assets or 6% of risk-weighted assets, whichever is higher, according to a fact sheet released Tuesday by the Federal Deposit Insurance Corporation (FDIC). The regulator said banks would be discouraged from holding debts of other lenders to reduce the risk of contagion.

The agencies acknowledged that the debt requirements would create “moderately higher funding costs” for regional banks.

However, the industry will have three years to comply with the new rule once it is enacted, and many banks already have acceptable forms of debt in place, according to regulators. They estimate that regional banks already have roughly 75% of the debt they will eventually need to hold.

President of the Federal Deposit Insurance Corporation (FDIC). Martin Groenberg He sent his intentions telegram last month at letter at the Brookings Institution.

Broadly speaking, the proposal takes measures that apply to the largest institutions – known in the industry as Global Systemic Banks, or GSIBs – down to the level of banks with assets of at least $100 billion. The moves were widely expected after the sudden collapse of the Silicon Valley bank last March shook customers, regulators and executives, alerting them to emerging risks in the banking system.

This includes steps to raise the levels of long-term debt held by banks, removing a loophole that allowed medium-sized banks to avoid acknowledging a decline in bond holdings, and forcing banks to submit more robust living wills or resolution schemes that would take a long time. effect in the event of failure.

Gruenberg said in his Aug. 14 letter that regulators will also consider updating their own guidance on monitoring risks including high levels of uninsured deposits, as well as changes to deposit insurance rates to discourage risky behaviour. The three banks seized by the authorities this year had relatively large amounts of uninsured deposits, which was a major factor in their failure.

Analysts have focused on debt requirements because this is the change that most affects bank shareholders. The goal of raising debt levels is so that if regulators need to take over a medium-sized bank, there is a layer of capital ready to absorb losses before uninsured depositors are threatened, according to Grunberg.

The regulators’ move will force some lenders to either issue more corporate bonds or replace existing funding sources with more expensive forms of long-term debt, Morgan Stanley analysts led by Manan Josalia wrote in a research note on Monday.

This will put more pressure on the margins of mid-sized banks, which are already under pressure due to higher funding costs. The group could see an annual profit drop of up to 3.5%, according to Gosalia.

There are five banks in particular that may need to raise nearly $12 billion in new debt, according to analysts: Regis, M&T Bank, Citizens Financial, Northern Trust and Fifth Third Bancorp.

Gruenberg said last month that having long-term debt on hand would calm depositors in times of trouble and reduce costs for the FDIC’s Deposit Insurance Corporation (FDIC). He said it also improves the chances of holding the bank’s weekend auction without using exceptional powers reserved for systemic risk, and gives regulators more options in that scenario, such as exchanging ownership or breaking up the banks to sell them in parts.

“While many regional banks have some outstanding long-term debt, the new proposal would likely require the issuance of new debt,” Gruenberg said. “Since this debt is long-term, it will not be a source of liquidity pressure when problems become apparent. And unlike uninsured depositors, investors in this debt know they will not be able to escape when problems arise.”

He added that investors in long-term bank debt would have “greater incentive” to monitor lenders’ risks, and publicly traded instruments would “serve as a signal” to the market’s view of the risks in these banks.

This story is evolving. . Please check back for updates

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