New guidelines are coming for how large regional banks should prepare themselves for bankruptcies, but some policy experts are already questioning if they will go far enough.
The Federal Reserve and the Federal Deposit Insurance Corp. issued a
While the move was embraced by some regulatory advocates who have argued for greater scrutiny of large regional banks, Dennis Kelleher, co-founder, president and CEO of the advocacy group Better Markets, said the fact that the agencies are issuing guidance rather than writing new regulations means the effort is unlikely to have a meaningful impact on bolstering financial stability.
"The Fed should not be issuing guidance — the Fed should engage in a formal rulemaking process for a regulatory structure that is both enforceable and binding," Kelleher said. "Guidance is just inviting an ongoing dispute with the banks about applicability and enforceability moving forward."
If all systemically important banks had sufficient resolution plans, also known as living wills, there would no longer be a need for too-big-to-fail designations, Kelleher said. By definition, a bank's failure would be handled in an orderly fashion without spillover effects, he said.
Under the current regulatory regime, he said, the Fed and FDIC can only go so far to make sure banks are fully resolvable. At the same time, because the exact details of individual bank shortcomings are protected as confidential supervisory information, markets cannot adequately price in risk.
"The Fed's pattern of depriving the public of even the most minimal of information about resolution plan deficiencies eliminates the possibility for market accountability," Kelleher said.
Last week's announcement confirmed a course of action on large bank oversight that bank regulators had been signaling for months. Acting
Fed Vice Chair for Supervision Michael Barr was the most recently regulatory chief to address the idea of revisiting living will policies. In a
"Many gains have been made from this process. While recognizing these gains, we need to continue to analyze whether firms are taking all appropriate steps to limit the cost to society of their potential failure," he said. "As such we will continue to work with the FDIC to rigorously review firm's plans making clear where firms do not meet our expectations and where remediation may be necessary. In addition, beyond globally systemically important banks, or G-SIBs, we'll be looking at the resolvability of some of the other largest banks as they grow and as their significance in the financial system increases."
The agencies already provide living will guidance to the eight global systemically important banks — Category I banks, or G-SIBs — which are required to file resolution plans every other year. The next largest groups of banks, those in Categories II and III, file them every three years but are not given the same level of scrutiny.
Jeremy Kress, a business law professor at the University of Michigan and former Fed attorney, said it is appropriate for regulators to rethink how they look at large regional banks. He suggests starting by rebranding them as domestic systemically important banks, or D-SIBs, as some other global regulatory jurisdictions do.
The last time the Fed and FDIC updated their resolution plan policies was in 2019. The impetus behind that round of changes — as with many initiatives undertaken during the Trump administration — was to remove undue burdens and make the process simpler. Kress said one of the results was a significantly less scrupulous regulatory framework for banks that were large but not globally systemically important.
"Aside from community banks with less than $10 billion in assets, this group of firms, the D-SIBS, were really the ones that benefited the most. They won significantly more deregulation than the G-SIBs did," Kress siad. "And so, I think it's right after such big deregulatory changes to go back and look at the financial stability risks that this class of firms might pose."
Without a clearly defined set of standards for how these banks should be crafting their living wills, Kress said, much of the oversight on this front is being done at a supervisory level, often bank-by-bank.
"By having public guidance out there, it will make it easier and more credible for the regulators to criticize those plans, when warranted, because the regulators will be able to point to public guidance, establishing expectations for what the resolution plans should be doing," he said.
Karen Petrou, co-founder of Federal Financial Analytics, said it is difficult to read too much into what the Fed and FDIC have in mind about specific changes to their resolution plan policies. She said it is likely that Category II and Category III banks will face more scrutiny than they currently do, albeit not as much as the G-SIBs, but little is clear beyond that.
Overall, Petrou said she supports a resolution planning framework that is conducted in an orderly fashion for all relevant institutions, which the agencies seem to be calling for, rather than the current regime, which places greater scrutiny on merging firms.
"That is an appropriate approach, it's good governance," Petrou said. "If you were doing it on a deal-by-deal basis, based on a policy issue that cuts across regional banks, it's really unfair to target one or another bank. This needs to be done across the sector."
Fed Gov. Michelle Bowman, who sits on the central bank's supervision and regulation committee, has also backed a more uniform approach to resolution planning oversight. In a
"It is hard to understand why banks that choose to grow through acquisition should be subject to different resolution expectations than banks that grow organically," Bowman said. "This strikes me as a clear example where requirements and expectations should only evolve through appropriate rulemaking processes, consistent with underlying law, in order to promote a level playing field."
In the joint announcement, the Fed and FDIC are aiming to have their guidance for living wills available at least one year before the next submission deadline for large non-G-SIBs, which is in the summer of 2024.
