The only person currently on the board of the federal bank deposit insurance agency who was there during the financial crisis warned this week that the current roll-back of post-crisis rules, coupled with too little attention paid to the risks posed by large regional banks, stands to undo recent years’ efforts aimed at preventing shock waves to the system from the future failure of a large bank.
Martin Gruenberg, a board member for the Federal Deposit Insurance Corp. (FDIC) (and formerly a chairman for the agency), told a gathering at The Brookings Institution Center on Regulation and Markets Wednesday that while regulators have appropriately focused since that crisis on the challenges posed by the resolution of global systemically important banks (GSIBs), “relatively little” attention has been paid to the resolution of large, regional banks in the United States.
Gruenberg defined this group as banks having between $50 billion and $500 billion in assets. He said the risks these institutions pose is significant given their size, complexity, and reliance on market funding and uninsured deposits. These factors combined “would present very substantial risks in resolution, with potential systemic consequences,” he said.
There were 39 banks in the United States with total assets between $50 billion and $500 billion as of second quarter 2019, Gruenberg said. Collectively they hold approximately $6 trillion in assets, or nearly 33% of banking industry assets. They hold $4.3 trillion of deposits, or 31% of total deposits in 189 million deposit accounts. Of these deposits, he said that $1.8 trillion, or approximately 43%, are uninsured “based on both the average and the median.”
“The size of these institutions, by definition, limits the universe of banks with the capability to acquire them if they fail,” he said.
Gruenberg pointed out the FDIC is required by statute to resolve a failed institution at least cost to the Deposit Insurance Fund, and it has two options for doing so: a traditional purchase-and-assumption transaction; and establishment of a bridge bank.
He noted that even though regional banks generally do not have the extensive international operations and diversified nonbank business lines characteristic of GSIBs, many of them have large branch networks, substantial IT systems, and millions of account holders. “This complexity, certainly as compared to smaller banks, would make the management of a bridge bank a significant operational challenge for the FDIC,” he said.
Such banks, as they rely more on credit-sensitive market funding than smaller banks do, are more susceptible to rapid failure caused by a lack of liquidity; pose a large challenge to the FDIC to make a rapid determination regarding the which accounts are and are not insured; and, unlike GSIBs, are not required to maintain a minimum amount of long-term unsecured debt to absorb losses. And he said that given their reliance on uninsured deposits, a least-cost resolution where there is no acquiring institution would have uninsured depositors taking losses, with potential “knock-on consequences for other regional banks, particularly in a stressed economic environment.”
Gruenberg said the FDIC (and other banking agencies) has taken actions since the crisis to enhance its ability to manage the orderly failure of a regional bank, including through a bridge bank if necessary. He pointed to resolution plan requirements, implementation of a quantitative liquidity coverage ratio (LCR), and a rule that requires institutions with more than 2 million deposit accounts to improve the quality of their data and change their information systems so the FDIC can make a rapid, accurate deposit insurance determination to facilitate prompt payment of insured deposits when large institutions fail.
The FDIC is now focusing on planning for the resolution of a large regional bank, and he said rulemaking to establish an unsecured debt requirement “might be prudent.”
Instead, he said, the agency and others have been working to loosen the above-noted requirements in actions that “only increase the challenges posed by the resolution of these institutions and the potential for disorderly failure.”