FDIC Chair Gruenberg Reviews Regulatory Reform Proposals Post Bank Failures

FDIC Chair Martin J. Gruenberg recounted the "lessons learned" from recent bank failures and suggested proposed rulemakings.

In remarks before the Brookings Institution Center on Regulation and Markets, Mr. Gruenberg stated that the respective failures of Silicon Valley Bank, Signature Bank and First Republic Bank had common characteristics that made them more susceptible to a run. These include (i) poor management and a lack of responsiveness to supervisory feedback and (ii) rapid growth while largely relying on uninsured deposits for funding.

Mr. Gruenberg identified the following "obvious lessons" that banking regulators should address:

• Capital and Debt Requirements. Mr. Gruenberg said that the recent proposal to implement the Basel III capital rule (see previous coverage) would address "one of the key vulnerabilities" of the recent failures by implementing capital level requirements so that unrealized losses on available-for-sale securities would "flow through regulatory capital for all banks with more than $100 billion in assets." In another proposal (to be released in the "near future"), Mr. Gruenberg said that banking agencies would impose long-term debt requirements designed to (i) reduce the chance of a bank run by absorbing losses before the "depositor class" (i.e., the FDIC and uninsured depositors) experience any losses, (ii) reduce costs to the Deposit Insurance Fund to minimize the need for invoking the systemic risk exception and (iii) create additional options in resolution.

• Insured Depository Institutions Resolution Plans ("IDI Plans"). Mr. Gruenberg touted anticipated proposed amendments to IDI Plan requirements to make them "significantly more effective." He noted that "robust [IDI] plans would have been helpful in dealing with the [bank] failure[s]." Mr. Gruenberg said that the rule proposal would require (i) "promptly establish[ing]" a virtual due diligence data room for parties to bid on a failed bank, (ii) safeguarding information necessary for the operational continuity of a bank and (iii) developing communication systems and strategies to get in touch with key stakeholders once a resolution is met.

• FDIC Supervision. Mr. Gruenberg emphasized "more forward-leaning" supervision of large regional banks as a key lesson for the FDIC. He said that the FDIC is currently considering whether its supervisory procedures with regard to banks’ funding concentrations need to be revised to "better capture risks related to high levels of uninsured deposits."