FDIC Chair Advocates Tougher Regulations on Large Regional Banks

The Chair of the Federal Deposit Insurance Corporation (FDIC), in a recent address at the Brookings Institution Center on Regulation and Markets, called for stronger regulations on large regional banks in the United States. The speech comes in the wake of the recent failures of three major regional banks and highlights the need for comprehensive measures to ensure financial stability and mitigate risks associated with such failures.

The FDIC Chair began by recounting the challenges posed by the resolution of large regional banks, emphasizing the distinct and significant risks they can pose to the financial system. Despite not being as large or complex as the Global Systemically Important Banks (G-SIBs), regional banks can trigger destabilizing contagion effects, particularly due to their heavy reliance on uninsured deposits for funding.

The recent failures of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank have underscored these vulnerabilities. The FDIC successfully resolved all three institutions, but the experience highlighted the potential for systemic disruptions and the use of extraordinary authority to protect uninsured depositors.

To address these challenges, the FDIC Chair proposed several key measures:

1. Capital Treatment of Unrealized Losses: The FDIC Chair emphasized the importance of addressing unrealized losses on available-for-sale securities. Proposed changes to the Basel III capital rule would require these losses to flow through regulatory capital, ensuring that banks maintain sufficient capital levels as these losses occur. This measure could help prevent a loss of market confidence and subsequent liquidity runs.
2. Long-Term Debt Requirement: The FDIC and other federal banking agencies are set to propose a requirement for banks with assets over $100 billion to issue long-term debt sufficient to recapitalize the bank in resolution. This would provide a buffer before uninsured depositors and the FDIC take losses, reducing the incentive for depositors to rapidly withdraw funds and potentially avoiding the need for systemic risk exceptions.
3. Resolution Plans for Insured Depository Institutions (IDI Plans): The FDIC plans to strengthen resolution planning requirements for large regional banks, requiring more comprehensive and robust plans that outline strategies for an orderly resolution. This includes strategies not dependent on over-the-weekend sales and identifying franchise components that could be sold to expand resolution options.
4. Supervision and Deposit Insurance Pricing: Improved supervision of large regional banks and risk-based deposit insurance pricing would address the liquidity risks associated with heavy reliance on uninsured deposits. Supervisory instructions could set thresholds for concentrations of uninsured deposits, and deposit insurance pricing could be adjusted to reflect the risk posed by such deposits.

The Chair's address emphasized the urgency of addressing vulnerabilities within the banking system, particularly concerning large regional banks. By implementing these measures, the FDIC aims to enhance the stability and resilience of the U.S. banking system and prevent potential systemic disruptions in the future.