What the Next Bank Failure Could Look Like

Federal bank regulators aim to revamp capitalization and resolution rules to significantly change how deposit runs and bank failures are managed in the future.

In a speech to the Brookings Institution on August 14, Federal Deposit Insurance Corporation (FDIC) chairman Martin Gruenberg highlighted that the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank highlighted the need for more robust capital requirements, resolution plans, and supervision.

All three banks shared “common characteristics” that made them more vulnerable to a run, Gruenberg said: a high reliance on uninsured deposits, unrealized losses on available-for-sale securities, and limited long-term debt.

To address these vulnerabilities, the FDIC, Federal Reserve and the Office for the Comptroller of the Currency collectively plan to introduce rules in three areas, Gruenberg said.

Banks with $100 billion or more in assets will be required to issue “long-term debt sufficient to recapitalize the bank” in the event of a liquidity crisis event. This is intended to absorb losses in the event of a bank failure and, Gruenberg posited, reduce the incentive for uninsured depositors to withdraw their capital.

In addition, banks with over $50 billion in assets would be required to submit more detailed plans that would allow the FDIC to resolve them in an orderly manner. Gruenberg outlined that both the SVB and First Republic situations would have been aided by “far more robust plans” for winding up the institutions.

Elements that would have assisted the interventions this spring, Gruenberg said, included a “capability to promptly establish a virtual due diligence data room” for potential acquirers, and improved maintenance of operational information and key contacts.

Regulators plan to require banks to include within resolution plans several options to assist in case of an institution’s failure, making it easier to break up a bank if needed rather than being restricted to a single buyer.

The FDIC chairman also called for “more forward-leaning supervision of large regional banks” to ensure that regulators are adequately capturing risks related to high levels of uninsured deposits.

“Once implemented, these measures will mitigate these risks and enhance the stability and resilience of the US banking system,” Gruenberg said. “These are perhaps lessons we should have learned from the 2008 financial crisis. The events of earlier this year provide us with another opportunity. This time I don’t think we’ll miss.”