The chair of the Federal Deposit Insurance Corporation wants more aggressive oversight of large regional banks.
Martin Gruenberg said the FDIC plans to propose a rule that would require banks with more than $50 billion in assets to provide certain information in the contingency plans they’re required to submit to regulators, outlining what they’ll do in case their institution runs into trouble.
He made the remarks on Monday at an event hosted by the Brookings Institution in Washington, DC.
“If we had any doubts about the challenges in resolving regional banks – and the potential for significant adverse impact on the financial system – they were dispelled by the failure this spring of three large regional banks,” Gruenberg said. “That experience should focus our attention on the need for meaningful action to improve the likelihood of an orderly resolution of large regional banks under the FDI Act, without the expectation of invoking the systemic risk exception.”
The FDIC chief praised a proposal that would require banks with more than $100 billion in assets to raise more capital to hedge against unrealized losses. He also touted a proposal that would implement a long-term debt requirement for large regional banks.
His remarks come after the failures of three regional banks earlier this year, which the FDIC took over as mandated by law. That ensured depositors maintained access to their money.
Federal Reserve Vice Chair for Supervision Michael Barr proposed a rule last month that would require banks with at least $100 billion in assets to be subject to the same scrutiny as banks with at least $700 billion in assets. That would mean those banks subject to the new rule would be required to hold an additional two percentage points of capital, or an additional $2 of capital for every $100 of risk-weighted assets.
The spring’s bank failures began with the spectacular depositor run on Silicon Valley Bank in March. The FDIC deemed the bank as systemically important, which gave regulators more power to intervene and make all deposits whole. Under current regulations, the FDIC insures deposits of up to $250,000 at FDIC-insured institutions. Some lawmakers have called to raise that amount. Regulators, including Gruenberg, have said more safeguards need to be in place to limit the use of that last resort.
Bank stresses have calmed since the spring, but the regional banking sector remains under pressure. Moody’s Investors Service downgraded the credit ratings of 10 regional banks last week and put the ratings of six others on review. The stock market performance of some smaller banks has been in flux since the spring.
Fears over the spring’s bank stresses weighing too much on access to credit was part of the reason why the Fed decided to pause in June. Central bankers later decided to hike interest rates to their highest level in 22 years in July after it became clear that credit conditions didn’t deteriorate more than expected and that there’s still more work to do to tamp down inflation.
Still, the overall banking sector remains stable, according to the Fed. The results of the Fed’s most recent series of stress tests showed that the largest US banks are able to weather a recession and still provide lending to consumers and businesses.