Brookings Institution Panel on Regional Bank Resolution with Martin Gruenberg

Brookings Institution

“Recession Preparation: What Happens When a Big Domestic Bank Fails?”

Wednesday, October 16, 2019

Key Topics & Takeaways

  • Systemic Risks of Regional Banks: Gruenberg argued that regional banks’ size, complexity and reliance on short-term funding all have potential systemic consequences and pose challenges to their resolvability.
  • Unsecured Debt: Gruenberg suggested that the FDIC should impose an unsecured debt requirement on regional banks to assure a measure of loss absorbing resources in resolution.

Speakers

  • Martin Gruenberg, Board Member and former Chairman, Federal Deposit Insurance Corporation
  • Sir Paul Tucker, Chair, Systemic Risk Council; Former Deputy Governor – Bank of England
  • Kieran Fallon, Senior Deputy General Counsel, PNC Financial Services Group
  • Jim Wigand, Former Managing Director, Millstein & Co.
  • Victoria Guida, Financial Services Reporter, Politico, Moderator

Keynote Address

Martin Gruenberg, Board Member and former Chairman, Federal Deposit Insurance Corporation (FDIC)

In his keynote address, Gruenberg commented that most attention on bank resolution matters has been focused on the globally systemically important banks (GSIBs), but that regional banks with $50-500 billion in assets also pose very significant resolution challenges to the FDIC that are “quite distinct” from those posed by either GSIBs or community banks. He said regional banks’ size, complexity and reliance on short-term funding all have potential systemic consequences.

Gruenberg outlined the FDIC’s resolution powers, which give it two options: a “purchase and assumption transaction” in which the FDIC sells some or most of a failing banks’ assets to a healthy acquiring bank; or an insured deposit payout in the event that no acceptable bids for a purchase and assumption transaction are received. He also noted that if additional time is needed to market a failed institution for a purchase and assumption, the FDIC can create a bridge bank that is temporarily owned and operated by the FDIC. He said the use of a bridge bank would have particular application in the resolution of a large regional bank.

Resolving large regional banks, Gruenberg explained, presents a distinct and underappreciated challenge given that their size and complexity limits the universe of banks with the capability to acquire them, which would likely necessitate the creation of a bridge bank. However, he argued that managing a failed regional bank through a bridge bank would be a challenge for the FDIC given their large branch networks, substantial IT systems and millions of account holders, as well as their greater reliance on credit-sensitive market funding as compared to community banks. Gruenberg also noted that regional banks are not required to hold any minimum level of long-term unsecured debt that could absorb losses in the case of failure, and that regional banks also have a heavy reliance on uninsured deposits that might be forced to take losses because of the possible lack of unsecured long-term debt.

Gruenberg noted several actions taken since the financial crisis by the FDIC to strengthen its resolution powers, including: implementing a requirement for banks with over $50 billion in assets to prepare resolution plans for the insured depository institution as a complement to bank holding company resolution plans; implementing a liquidity coverage ratio (LCR) for all banks with over $100 billion in assets; and requiring institutions with over two million deposit accounts to improve the quality of their deposit data and make changes to their information systems so that the FDIC could make quick and accurate deposit insurance determinations. He then suggested further work could be done to require that large regional banks hold unsecured debt to assure loss-absorbing resources are in place in the event of a resolution.

However, Gruenberg lamented that rather than building on the FDIC’s capabilities, recent measures taken up by its Board have weakened or removed requirements to improve resolvability. He criticized decisions to extend the compliance period for banks to improve their deposit data, to eliminate resolution plan and LCR requirements for banks with assets between $100-250 billion entirely, and to extend resolution plan filing timelines and reduce LCR requirements for firms with $250-500 billion in assets. Gruenberg said that given the risks associated with the failure of large regional banks, these actions by the FDIC are “unwarranted and misguided.”

Questions and Answers

Asked about comments from Federal Reserve Vice Chair for Supervision Randal Quarles that regional banks do not pose complexity challenges for resolution, Gruenberg contended that the challenges are not theoretical, pointing to the examples of Washington Mutual and IndyMac, noting how difficult the IndyMac resolution was with assets of just $30 billion. He said the risks are “not insuperable” but require attention, planning and additional resources and capabilities at the FDIC. He again suggested consideration of unsecured debt requirements.

Asked about the extending filing timelines for resolution plans, Gruenberg said there is some room for accommodation, and that making filing biennial rather than annual could be reasonable for the banks preparing plans and the supervisors reviewing them. However, he said moving to a three-year cycle with full plans filed every six years “attenuates the process to an extreme.”

Panel Discussion

Panel Participants:

  • Sir Paul Tucker, Chair, Systemic Risk Council; Former Deputy Governor – Bank of England
  • Kieran Fallon, Senior Deputy General Counsel, PNC Financial Services Group
  • Jim Wigand, Former Managing Director, Millstein & Co.
  • Victoria Guida, Financial Services Reporter, Politico, Moderator

Fed and FDIC Rulemakings

Guida opened the panel discussion by asking whether recent rulemakings by the Federal Reserve and FDIC have impacted the likelihood of a bank failure. Tucker said moves to relax or remove resolution planning requirements would increase the likelihood of failure “a bit,” but that it would also hurt the capacity for an orderly resolution. He said no reasonable regulator could reach the decision to abolish resolution planning for banks with assets between $100-250 billion, but that the FDIC could remedy this by requiring regional banks to issue unsecured debt.

Fallon stated that reducing capital levels could increase the probability of failure, but only to a degree. He pointed out that capital levels were substantially increased after the crisis and that the recent rulemakings only fine-tune those requirements. He noted that banks with over $100 billion in assets will still be subject to liquidity stress testing and that for many firms this is actually the binding liquidity restraint.

Systemic Risk of Regional Banks

Guida asked whether large regional banks can be too big to fail, to which Wigand responded that it would depend on the context and circumstances of the failure and the health of the broader economy and financial system. Tucker said a regional bank failure could lead to a run on deposits, which could put uninsured deposits at other institutions at risk and potentially lead to bailout. Tucker added that if a regional bank failure does not go smoothly, then no one would believe in the credibility of GSIBs’ resolution plans either.

Fallon pointed out that PNC does have a resolution plan that has been determined to be credible. He acknowledged that a bridge bank would probably be the more likely resolution scenario for a large regional bank failure. He agreed there are challenges presented by large regional bank failures, but that credible options do exist and banks are in favor of making resolution plans work.

Bank Mergers and Acquisitions

Guida noted the trend of mergers and acquisitions in the banking industry and asked whether this complicated resolution by creating more larger institutions. Fallon answered that there are reasons for mergers, such as the need for scale in technology and cybersecurity. He opined that having a strong regional bank presence to compete with the largest and most complex institutions is a good thing. He expressed doubt that regulators would be open to mergers of banks that would lead to a new GSIB.

Wigand pointed out that consolidation is likely to continue because larger institutions have the money to invest in new technology platforms and build on organic growth. He said that regulations would come into play to ensure that consolidation does not result in a higher risk of failure.

Tucker said he believes a fragmented banking system is safer, and that it “should be a matter of regret” that the GSIBs have grown even larger.

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