FDIC to propose long-term debt rule for large banks

Martin Gruenberg
Martin Gruenberg, chair of the Federal Deposit Insurance Corporation, said in August that requiring more banks to hold long-term debt "makes it more likely that a closing weekend sale could comply with the statutory least-cost test and avoid the need for a systemic risk exception." The FDIC is slated to take up a long-term debt proposal Aug. 29.
Bloomberg News

The Federal Deposit Insurance Corp. will hold a public meeting next week to discuss several matters related to the resilience and resolvability of large banks.

The agency's board of directors is set to propose a new rule requiring certain large and foreign banks to hold long-term debt during a public meeting at 10 a.m. next Tuesday, according to a notice posted online Wednesday morning.

The rule will apply to "large bank holding companies, certain intermediate holding companies of foreign banking organizations, and large insured depository institutions," according to the notice, though recent comments from FDIC Chair Martin Gruenberg suggest the target will be banks with at least $100 billion of assets.

The board will also discuss resolution plan requirements for banks of various sizes and propose new guidelines for the large institutions that are required to submit detailed plans every three years — also known as triennial full filers. 

Earlier this month, Gruenberg highlighted the need for banks with $100 billion of assets or more to have "buffers" of unsecured debt to recapitalize themselves in times of distress. Currently, only the largest, global systemically important banks are required to hold long-term debt as part of their total loss absorbing capacity, or TLAC, requirement.

During an event at the Brookings Institution, Gruenberg argued that forcing more banks to issue long-term, unsecured debt would shift the cost burden of failures onto private investors rather than depositors or the government-backed insurers.

"Even if the institution fails, the buffer of long-term debt reduces cost to the Deposit Insurance Fund, and makes it more likely that a closing weekend sale could comply with the statutory least-cost test and avoid the need for a systemic risk exception," Gruenberg said. "Further, it creates additional options in resolution, such as recapitalizing the failed bank under new ownership or breaking up the bank and selling portions of it to different acquirers, as an alternative to a merger with another large banking institution."

At the same event, Gruenberg also made the case that a long-term debt requirement and more comprehensive resolution plan could have prevented Silicon Valley Bank from failing earlier this year. He noted that the bank could have sold unsecured debt to generate liquidity rather than realizing losses on its securities and added that the additional oversight from holders of the bank's uninsured debt would have been a check on its risk taking.

"This gives them a greater incentive to monitor risk in these banks and exert pressure on management to better manage risk," he said.

Gruenberg also noted that requiring some smaller banks to file resolution plans could be helpful to ensure rapidly growing banks are prepared for episodes of distress. He pointed to New York-based Signature Bank, which failed just days after Silicon Valley, as a bank that could have benefited from having a resolution plan completed earlier. Signature was just a few months away from having to file its first resolution plan.

On Tuesday, the FDIC will discuss resolution plans for banks with $100 billion or more in total assets as well as informational filings requirements for insured depositories with at least $50 billion but less than $100 billion of assets.

"A stronger resolution planning requirement for large regional banks, combined with a long-term debt requirement, would provide a much stronger foundation for the orderly resolution of these institutions," Gruenberg said.

For reprint and licensing requests for this article, click here.
Regulation and compliance Politics and policy
MORE FROM AMERICAN BANKER