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US banking regulators want to make emergency fire sales of large regional banks a thing of the past by requiring lenders to come up with “living wills” that would make it easier to wind down a troubled institution.
Banks with more than $100bn in assets would be required to submit much more detailed resolution plans and required to raise new unsecured debt that could be used to recapitalise a failed bank, Martin Gruenberg, chair of the Federal Deposit Insurance Corporation, said on Monday.
The watchdog is responding to the failure this spring of Silicon Valley Bank, Signature Bank and First Republic, which were all seized, shut down and sold to larger lenders at a big loss to the FDIC’s deposit insurance fund.
The first two collapses destabilised the broader American banking system, leading to deposit flight and falling share prices at midsized lenders. US watchdogs were also forced to declare the SVB and Signature failures a “systemic risk”, allowing them to guarantee deposits above the normal $250,000 deposit insurance limit.
In a speech to the Brookings Institution, Gruenberg said the FDIC, Federal Reserve and the Office of the Comptroller of the Currency plan to introduce formal proposals “in the near future”.
“The proposed rule would require a bank to provide a strategy that is not dependent on an over-the-weekend sale,” he said, referring to the practice whereby regulators take over a bank when markets are closed.
He said lenders would be required to explain how they would be placed into a bridge bank — a temporary entity that runs an insolvent bank while a buyer is found — and how they could continue operating while separating from the parent company.
Gruenberg said the plans would make it much easier to break up failing banks and sell them in parts. That could help avoid a repeat of the First Republic situation, when the sale of its assets and deposits to JPMorgan Chase, the US’s largest lender, drew criticism for increasing banking concentration.
After the 2008 financial crisis, regulators worldwide started requiring globally systemic banks to submit detailed living wills, but smaller US lenders have not faced the same requirements.
“These are perhaps lessons we should have learned from the 2008 financial crisis. The events of earlier this year provide us with another opportunity. This time I don’t think we’ll miss,” Gruenberg said.
Shares in large regional lenders Truist, PNC and US Bank closed lower by 3.7 per cent, 2 per cent and 1.9 per cent, respectively, following the remarks.
Along with the new regulations on resolution plans, Gruenberg said the FDIC and other regulators would move forward on a proposed rule that would require large regional banks — those with $100bn assets or more — to raise additional debt, providing an additional backstop to cover losses in the event of a failure.
The proposal follows a similar one made in October for larger banks with at least $250bn of assets.
Gruenberg on Monday said that the regional banking crisis made it clear that the debt requirement should include regional lenders as well. The proposal, which would increase costs for regional banks, comes when they are already contending with depositors demanding higher rates.
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