Davis Polk partner and Financial Institutions practice chair Randy Guynn was quoted in American Banker discussing the FDIC’s recent proposal requiring regional banks to issue more long-term debt.

Randy noted that the tonal discrepancy between the banking industry trade responses this week and their uproar over new capital hikes earlier this year could partly be attributed to the fact that the eight Global Systemically Important Banks already face such debt requirements. “The going-concern capital — what has been talked about the last couple of weeks — is higher on people’s minds than the so-called gone-concern capital that the long term-debt requirement addresses,” he said. “This long-term debt or credit didn’t really affect the GSIBs in any material way, so for them it’s a non-event. It’s a big event for the regional banks and the midsize banks, but they tend not to be quite as vocal.”

He continued, pointing out that the long term-debt creates a secondary layer of de-facto deposit insurance and gives the FDIC more options when a bank fails. “It reduces the risk to the historic deposit insurance fund, so it does give the FDIC more flexibility,” he said.

Randy also said that this proposal opens the door for single-point-of-entry recapitalization strategies in the future. “They’re not saying that the regional banks have to change their strategy from what’s called a bridge bank strategy to a single-point-of-entry strategy, but they’re saying they would like to have the option to be able to execute one and this will help them do it,” he said, adding that the move “could well push the regional banks towards the single point of entry strategy.”

Discussing the new costs of the rule, Randy thinks they could incentivize regional banks to get bigger. “The proposed increased capital requirements and this new long-term debt — which regional banks never paid before — will definitely increase their cost of doing business in fairly significant ways,” he said. “They’re subject to the same sort of costs as the GSIBs but they have a much smaller scale, so those higher costs are going to create a big economic incentive for the regional banks to actually merge and become bigger so that they have a larger scale to be able to spread those large cost across.”

However, whether these rules stop bank runs is another question, he said. “I think the most important thing to stop runs is the market having confidence that the assets that the bank has that are ready to be pledged to the discount window for emergency loans from the Federal Reserve are sufficient,” he noted. “If [depositors] know they can get paid, they probably won’t run.”

Banks offer muted criticism of long-term debt and resolution plan proposals,” American Banker (August 31, 2023) (subscription required)