USA map and coins

Rapid regional bank growth is leading some players into “too big to fail” territory, guiding regulators to consider new debt requirements. James King reports.

US banking regulators are considering minimum long-term debt buffer rules for regional lenders, according to a report by the Wall Street Journal. The potential move is being considered against a backdrop of heightened economic and financial market uncertainty, while concerns rise over the growth trajectory of regional banks and their impact on sector-wide stability.

Though concrete proposals on the issue are yet to emerge, there is an expectation that any long-term debt requirement for regional banks could mirror, in relative terms, total loss-absorbing capacity (TLAC) rules for US global systemically important banks (G-SIBs).

High regional growth

Regional banks in the US have developed in size and importance in recent years, both organically, as a result of underlying business fundamentals, and inorganically, through merger and acquisition activity. In this market segment, this has contributed to asset and deposit growth outstripping that of larger players by a considerable margin in recent years, according to research from the Securities Industry and Financial Markets Association. These developments have not escaped the attention of US regulatory authorities. 

“The larger size of regional banks is worrying regulators,” says Jenna McNamee, a banking analyst at Insider Intelligence, a forecasting and analysis firm in New York. “The failure of any of these banks would have serious implications, not only regionally, but across the financial system.”

During a September 2022 speech at the Brookings Institution in Washington DC, Michael S Barr, the Federal Reserve’s vice-chair for supervision, noted that the Fed would be “looking at the resolvability of some of the other largest [non-G-SIB] banks as they grow and as their significance in the financial system increases”. This follows comments from officials at the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation earlier this year, in which they indicated support for higher debt buffers for these institutions.

New debt demands

“Regional banks have developed ‘living wills’, or plans to wind down in the event of an economic crisis without government assistance,” says Ms McNamee. “But the regulatory proposals would extend some of the post-Great Recession mandates for major banks to these regional competitors. Specifically, these banks would need to maintain debt levels in proportion to the levels required at major banks.”

Ratings agency Fitch has calculated that Category II and III banks – classed by the Fed as large but non-systemically important institutions – would need to raise an additional $60bn in long-term debt, under a situation in which their debt requirements have to meet the greater of either 4.5% of leverage exposure or 6% of risk-weighted assets. The biggest US banks not currently subject to the TLAC requirements imposed on G-SIBs include US Bancorp, Charles Schwab, Northern Trust, PNC, Truist and Capital One, according to Fitch. 

the need to beef up their debt buffer would increase costs for both the banks and their customers

Jenna McNamee

Nevertheless, new regulatory obligations along these lines are unlikely to be greeted favourably by market participants. As research from Insider Intelligence has made clear, industry groups are preparing to push back against any changes, while the Bank Policy Institute, a policy and advocacy group, has underscored the limited regulatory benefits when weighed against the costs of any potential change for banks and their customers. 

“I do believe the pushback on regulators would be pretty strong and well supported. The operations of these medium-sized banks are typically funded by deposits, rather than some of the other revenue-generating business lines that support major banks,” says Ms McNamee. “So for regional banks, the need to beef up their debt buffer would increase costs for both the banks and their customers.”

Regulation is coming

Though deteriorating financial and economic conditions have helped to push the regulators’ agenda forward, the macroeconomic backdrop is not the only consideration in play. Indeed, the swift pace of merger activity taking place among this market cohort is also increasing fears that the conclusion of these deals will, in some cases, produce an institution of both a size and scale that could single-handedly undermine system stability in a worst-case scenario. As a result, there is likely to be a regulatory proposal on the table before long. 

“I think regulators are trying to put standards in place that these regional banks must meet before a merger is approved to avoid a situation where medium-sized banks become ‘too big to fail’ after they merge – the government doesn’t want to have to bail them out. So in a sense it’s about preparation, but maybe not the preparation that everyone immediately assumes,” says Ms McNamee.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter