FDIC chair promises stricter rules for mid-sized banks

A senior regulator says the US will tighten rules for regional banks following the collapse of Silicon Valley Bank (SVB) and several other firms.

The new regulations aim to shield taxpayers and depositors from losses and give officials more flexibility in winding up failed banks.

Martin Gruenberg, the chair of the Federal Deposit Insurance Corporation (FDIC), said on August 14 that mid-sized banks will have to issue more long-term debt and file more detailed resolution plans.

Speaking at the Brookings Institution think-tank, Gruenberg recounted how a series of bank runs capsized SVB and Signature Bank in March, followed by First Republic at the start of May.

Gruenberg listed these banks’ vulnerabilities, most prominently a reliance on uninsured deposits. SVB’s failure set off runs at other mid-sized banks with large volumes of unsecured deposits, forcing the FDIC to invoke a “systemic risk exception” and insure all deposits at SVB and Signature.

Normally, only the first $250,000 worth of deposits are insured, a limit included in the Dodd-Frank Act.

Gruenberg also admitted SVB and Signature were badly managed and insufficiently supervised.

Dean Baker, a senior economist at the Center for Economic and Policy Research, tells Central Banking it was “striking” how slowly supervisors had acted to deal with SVB’s failings.

“I’m not sure if this was a go-slow mindset put in place by [Randal] Quarles or a longer-standing issue with the way regulators move,” Baker says, referring to the former Federal Reserve vice-chair for supervision. Quarles championed regulatory “tailoring”, which eased rules for mid-sized banks.

Gruenberg said the corporation will soon propose new rules requiring banks with $100 billion or more in assets to provide detailed resolution plans. SVB and First Republic had turned in “living wills” of this type, but Gruenberg said these lacked vital details. The missing information – about assets, operational continuity and communications and other matters – hampered the sales of the distressed banks.

The new resolution plans would require banks to map out multiple resolution strategies. Banks will have “to provide a strategy that is not dependent on an over-the-weekend sale”, which could include bridging operations or selling off parts of the bank.

The Dodd-Frank Act requires all banks with $50 billion or more in assets to provide resolution plans to regulators.

The FDIC, along with the Federal Reserve and Office of the Comptroller of the Currency, will also propose obliging banks with $100 billion or more in assets to issue long-term debt “sufficient to recapitalise the bank in resolution”. These bondholders would help shield depositors, as they would take losses in resolution before depositors.

Baker says it will take time to build up a viable market for this sort of long-term debt. “Presumably we’re talking about five to 10 years, and even that will depend on the state of the economy. It will be harder to build up this buffer, if rates stay high and/or the economy falls into recession,” he says.

Gruenberg also said the corporation would consider reforming examination manuals to increase scrutiny of banks that rely heavily on unsecured deposits.

The FDIC chair mentioned regulators could discourage banks from depending on unsecured deposits with “risk-based deposit insurance pricing”. However, he saw this as a secondary measure, “a complement to other tools that mitigate the risk of over-reliance on uninsured deposits”.

Gruenberg referenced the three agencies’ joint regulatory proposal for implementing the Basel III recommendations, published on July 27. These would require banks with $100 billion or more in assets to raise more capital. Republican members of the Federal Reserve Board have expressed reservations about the proposals.

The draft rules would require banks to account for “unrealised losses on available for sale securities” when calculating their legal capital requirements. SVB failed to do this, and it was the sudden realisation of these losses that sparked the bank run that sealed its demise.

Baker says some regulatory proposals may not involve “formal rule-making”. He adds those measures that do require formal regulation can likely be completed before the end of US president Joe Biden’s current term in January 2025.