US Regulators Unveil New Rules Targeting Regional Banks
U.S. financial regulators from the FDIC, OCC, Treasury Department, and Federal Reserve unveiled a new set of rules on Tuesday designed to prevent more bank failures, dealing another blow to regional banks that could be burdened with more requirements.
Key Takeaways
- U.S. financial regulators unveiled a new set of rules on Tuesday designed to prevent more bank failures.
- Banks with more than $100 billion in assets would be required to hold long-term debt exceeding 6% of risk-weighted assets or 3.5% of average total assets, based on whichever figure is greater.
- In the aftermath of this year’s banking crisis, financial regulators have moved to enforce stricter regulations and capital requirements on the industry in an effort to prevent future contagion.
- The new rules could increase funding costs for banks and put pressure on their earnings at a time when profitability has soured due to rising interest rates and economic uncertainty.
Under the new regulations, banks with more than $100 billion in assets would be required to hold long-term debt exceeding 6% of risk-weighted assets or 3.5% of average total assets, based on whichever figure is higher. Another provision deals with the content and timing of submitting resolution plans, also known as “living wills,” which assist regulators in winding down financial institutions at risk of failure.
The logic behind raising debt levels is that it would provide regulators with an additional financial cushion should they need to seize a lender. That cushion would help absorb a lender’s losses before uninsured depositors—those with more than $250,000 in their accounts—are impacted.
Until now, only the biggest lenders had been subject to minimum long-term debt requirements. The OCC defines midsize banks as those with assets ranging from $15 billion to $115 billion, meaning the upper tier of these would be subject to the new debt holding rules.
In the aftermath of this year’s banking crisis, which witnessed the collapse of several high-profile lenders including Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank, banking regulators have moved to enforce stricter regulations and capital requirements on the industry in an effort to prevent future contagion. The FDIC last month pressed regional banks to change the way they report uninsured deposits, which played a leading role in the crisis. Meanwhile, credit rating agencies including Standard & Poor’s and Moody’s Corp. have downgraded several regional lenders and issued negative outlooks for others.
The new rules could increase funding costs for banks and pressure their earnings at a time when profitability has soured due to rising interest rates and economic uncertainty. The Fed’s rate hikes have caused consumers to take out fewer loans as interest rates have spiked. Meanwhile, outflows of non-interest-bearing deposits in the aftermath of the banking crisis have pressured lenders’ net interest margins, a key profitability metric that measures the difference between interest earned on loans and interest paid out to depositors.
However, the industry would have three years to implement the rules once enacted, giving banks time to adjust their balance sheets. FDIC regulators also estimate that regional banks already hold roughly 75% of the long-term debt required under the new rules.
The proposed rule changes have yet to be implemented and are open to public review and recommendations. Comments can be submitted to the FDIC between now and November 30.