Skip to content

US Banks to Increase Debt Cushion by $70 Billion

The Federal Deposit Insurance Corporation (FDIC) has proposed a series of rules to ensure the safe dissolution of regional banks during stressful times, including a significant increase in long-term debt issuance.

FDIC logo
FDIC logo

Strengthening Financial Stability

The FDIC has proposed five new rules aimed at ensuring that banks with assets over $100 billion are prepared for potential failures and can be dissolved smoothly and quickly. One key proposal requires banks to issue more long-term debt, which will provide more funds to offset potential losses, reassure depositors, and encourage investors to monitor a bank's operations closely, according to FDIC Chairman Martin Gruenberg.

Raising Long-term Debt

Banks will be required to increase their long-term debt issuance by approximately 25%, or $70 billion, the FDIC said. Firms will have three years from the rule's adoption to meet this new standard. The required level for each bank will be based on percentages of the firm's risk-weighted assets, total assets, or total leverage, depending on which yields the highest number.

Impact on Regional Banks

Regional banks such as PNC Financial Services Group Inc., Fifth Third Bancorp, and Citizens Financial Group Inc. will be affected by these tougher rules. This move follows a tumultuous spring during which three banks failed, forcing regulators to tap into the FDIC's insurance fund to sell off pieces of the firms to willing buyers.

Addressing Underlying Vulnerabilities

"The failure of three large regional banks this spring demonstrated the risk to financial stability that large regional banks can pose," Gruenberg said in a speech earlier this month. He added that this situation makes a compelling case for federal bank regulatory agencies to address the underlying vulnerabilities that made the failure of these institutions possible.

Overhauling Rules for Safe Dissolution

The FDIC also proposed an overhaul of its rules on how banks must show regulators that they can be safely dissolved after failing. Firms will be required to submit more detailed plans, including showing how they could operate indefinitely as bridge banks by the FDIC after failing, and ensuring they can quickly hand over key data to regulators and prospective buyers after a failure.

Avoiding Rushed Bank Sales

Based on the spring banking turmoil and Gruenberg's speech, it is clear that regulators want to avoid rushed, over-the-weekend bank sales that either deplete the FDIC's Deposit Insurance Fund or require selling to an already giant bank, as noted by Ian Katz, managing director of Capital Alpha Partners.

Industry Pushback

The banking industry is already pushing back against the proposal and similar efforts, calling them unjustified and economically harmful. "The FDIC and other regulators must demonstrate that all of these proposed changes are justified by evidence and outweigh the significant costs to our economy,” said Rob Nichols, head of the American Bankers Association, in response to Gruenberg's speech.