By using this site, you agree to the Privacy Policy and Terms of Use.
Accept
AmextaFinanceAmextaFinance
  • Home
  • News
  • Banking
  • Credit Cards
  • Loans
  • Mortgage
  • Investing
  • Markets
    • Stocks
    • Commodities
    • Crypto
    • Forex
  • Videos
  • More
    • Finance
    • Dept Management
    • Small Business
Notification Show More
Aa
AmextaFinanceAmextaFinance
Aa
  • Banking
  • Credit Cards
  • Loans
  • Dept Management
  • Mortgage
  • Markets
  • Investing
  • Small Business
  • Videos
  • Home
  • News
  • Banking
  • Credit Cards
  • Loans
  • Mortgage
  • Investing
  • Markets
    • Stocks
    • Commodities
    • Crypto
    • Forex
  • Videos
  • More
    • Finance
    • Dept Management
    • Small Business
Follow US
AmextaFinance > Banking > Regional banks face another hit as regulators force them to raise debt levels
Banking

Regional banks face another hit as regulators force them to raise debt levels

News Room
Last updated: 2023/08/29 at 11:27 AM
By News Room
Share
6 Min Read
SHARE

Martin Gruenberg, Chair of the Federal Deposit Insurance Corporation (FDIC), testifies about recent bank failures during a US Senate Committee on Banking, House and Urban Affairs hearing on Capitol Hill in Washington, DC, May 18, 2023.

Saul Loeb | AFP | Getty Images

U.S. banking regulators on Tuesday unveiled plans to force regional banks to issue debt to protect depositors in the event of more failures.

American banks with at least $100 billion in assets would be subject to the new requirement, which makes them hold a layer of long-term debt to absorb losses in the event of a government seizure, according to a joint notice from the Treasury Department, Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corporation.

Impacted lenders will have to maintain long-term debt levels equal to 3.5% of average total assets or 6% of risk weighted assets, whichever is higher, according to a fact sheet released Tuesday by the FDIC. Banks will be discouraged from holding the debt of other lenders to reduce contagion risk, the regulator said.

The debt requirements will create “moderately higher funding costs” for regional banks, the agencies acknowledged.

Still, the industry will have three years to conform to the new rule once enacted, and many banks already hold acceptable forms of debt, according to the regulators. They estimated that regional banks already have roughly 75% of the debt they will ultimately need to hold.

FDIC Chairman Martin Gruenberg telegraphed his intentions last month in a speech at the Brookings Institution.

Broadly, the proposal takes measures that apply to the biggest institutions — known in the industry as global systemically important banks, or GSIBs — down to the level of banks with at least $100 billion in assets. The moves were widely expected after the sudden collapse of Silicon Valley Bank in March jolted customers, regulators and executives, alerting them to emerging risks in the banking system.

That includes steps to raise levels of long-term debt held by banks, removing a loophole that allowed midsized banks to avoid the recognition of declines in bond holdings, and forcing banks to come up with more robust living wills, or resolution plans that would take effect in the event of a failure.

Regulators would also look at updating their own guidance on monitoring risks including high levels of uninsured deposits, as well as changes to deposit insurance pricing to discourage risky behavior, Gruenberg said in the Aug. 14 speech. The three banks seized by authorities this year all had relatively large amounts of uninsured deposits, which were a key factor in their failures.

What’s next for regional banks?

Analysts have focused on the debt requirements because that is the most impactful change for bank shareholders. The point of raising debt levels is so that if regulators need to seize a midsized bank, there is a layer of capital ready to absorb losses before uninsured depositors are threatened, according to Gruenberg.

The regulators’ move will force some lenders to either issue more corporate bonds or replace existing funding sources with more expensive forms of long-term debt, Morgan Stanley analysts led by Manan Gosalia wrote in a research note Monday.

That will further squeeze margins for midsized banks, which are already under pressure because of rising funding costs. The group could see an annual hit to earnings of as much as 3.5%, according to Gosalia.

There are five banks in particular that may need to raise a total of roughly $12 billion in fresh debt, according to the analysts: Regions, M&T Bank, Citizens Financial, Northern Trust and Fifth Third Bancorp.

Having long-term debt on hand should calm depositors during times of distress and reduces costs to the FDIC’s own Deposit Insurance Fund, Gruenberg said last month. It also improves the chances that a weekend auction of a bank could be done without using extraordinary powers reserved for systemic risks, and gives regulators more options in that scenario, like replacing ownership or breaking up banks to sell them in pieces, he said.

“While many regional banks have some outstanding long-term debt, the new proposal will likely require issuance of new debt,” Gruenberg said. “Since this debt is long-term, it will not be a source of liquidity pressure when problems become apparent. Unlike uninsured depositors, investors in this debt know that they will not be able to run when problems arise.”

Investors in long-term bank debt will have “greater incentive” to monitor risk at lenders, and the publicly traded instruments will “serve as a signal” of the market’s view of risk in these banks, he said.

This story is developing. Please check back for updates.

Read the full article here

News Room August 29, 2023 August 29, 2023
Share this Article
Facebook Twitter Copy Link Print
Leave a comment Leave a comment

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Finance Weekly Newsletter

Join now for the latest news, tips, and analysis about personal finance, credit cards, dept management, and many more from our experts.
Join Now
Uber wins multimillion-pound reprieve on disputed UK tax payments

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects…

An American pope for the global south

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects…

China and US kick off high-stakes trade talks in Geneva

Unlock the White House Watch newsletter for freeYour guide to what Trump’s…

How this CEO tackled his own financial woes

Watch full video on YouTube

Meet The New Amazon Robot That Can Feel What It Touches

Watch full video on YouTube

- Advertisement -
Ad imageAd image

You Might Also Like

Banking

One Of America’s Longest-Serving CEOs Has Advice On Humor And Risk

By News Room
Banking

6 Resources Investors Can Be Thankful For This Holiday Season

By News Room
Banking

From Fintech’s Top Founders To Wall Street’s Best Dealmakers: 30 Under 30 Finance 2024

By News Room
Banking

One Part Tech, One Part Data, And Lots Of Human Curiosity

By News Room
Banking

The Evolution Of Bank-Fintech Partnerships

By News Room
Banking

Binance Dies, And Crypto Is Birthed

By News Room
Banking

Vote For The World’s Best Banks 2024

By News Room
Banking

Why Javier Milei’s Victory In Argentina’s Presidential Election Is Great News

By News Room
Facebook Twitter Pinterest Youtube Instagram
Company
  • Privacy Policy
  • Terms & Conditions
  • Press Release
  • Contact
  • Advertisement
More Info
  • Newsletter
  • Market Data
  • Credit Cards
  • Videos

Sign Up For Free

Subscribe to our newsletter and don't miss out on our programs, webinars and trainings.

I have read and agree to the terms & conditions
Join Community

2023 © Indepta.com. All Rights Reserved.

YOUR EMAIL HAS BEEN CONFIRMED.
THANK YOU!

Welcome Back!

Sign in to your account

Lost your password?