FDIC to propose changes to US bank living wills.

FDIC to propose changes to US bank living wills.

Overhauling Living Wills: Strengthening Oversight of Large Regional Banks

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In an effort to strengthen oversight of the banking system and prevent future collapses, the U.S. Federal Deposit Insurance Corporation (FDIC) is planning to overhaul the way large regional banks prepare living wills, according to FDIC Chairman Martin Gruenberg. This regulatory proposal, which will be a comprehensive restatement of the rule for notice and comment, aims to make the planning process significantly more effective.

The need for improved oversight comes in the wake of the March collapses of three of the largest banks in U.S. history. These failures have highlighted the importance of having robust plans in place to wind up a bank’s business in the event of failure. Currently, banks are required to submit such plans, known as living wills, to regulators.

Gruenberg emphasized that the proposed rule would require banks to provide a strategy that is not dependent on an over-the-weekend sale. This change is significant as it would give the FDIC more options when overseeing a failed bank’s receivership. The proposed requirements for living wills are separate from those for large bank holding companies under the 2010 Wall Street reforms.

The proposal also aims to address the lack of information available during previous bank failures. Gruenberg noted that regulators dealing with the failures of Silicon Valley Bank and Signature Bank earlier this year could have benefited from more robust information on how quickly banks could set up a “data room” for potential buyers, as well as information on continuing operations and internal communications. To rectify this, the proposal would include additional requirements for banks to identify parts that could be sold separately. This could not only reduce the size of the banks but also expand the universe of potential acquirers.

Moreover, the proposed rule would apply to banks with more than $50 billion in assets. While these banks account for just 1% of the total number of U.S. banks, they hold a staggering 80% of all uninsured deposits. This concentration of deposits makes them more vulnerable to runs and highlights the necessity for stricter oversight.

The FDIC’s regulatory proposal is part of a broader effort by U.S. regulators to implement changes aimed at strengthening the banking system. In late July, the top three U.S. banking regulators issued a joint proposal for sweeping changes to bank capital requirements, aligning them with the 2017 international agreement. However, the industry has vowed to fight these changes, making it evident that the road to strengthening oversight will be met with opposition.

Amidst a series of collapses and challenges in the banking sector, this regulatory proposal for overhauling living wills comes as a positive step towards preventing future failures. By providing more effective strategies and increasing the options available to regulators in the event of a bank’s failure, this proposal aims to create a more resilient and secure banking system.