Big Regional Banks Might Face New Rules for Dealing With a Crisis

The most likely path for achieving these new requirements is through a formal rule-making process led by the Federal Reserve, the prospects for which banks and their trade groups are already beginning to fight on the grounds that the measure is unneeded and that their costs outweigh any benefits.

At issue are concerns among the Biden administration and its top regulators that the steady growth of the nation’s largest regional banks, a group that includes firms such as U.S. Bancorp, USB 0.00%▲ Truist Financial Corp. TFC -1.04%▼ and PNC Financial Services Group Inc., has introduced new risks to the financial system. While these firms may lack the vast trading floors and international operations of megabanks like JPMorgan Chase JPM -0.67%▼ & Co. and Bank of America Corp., BAC -1.13%▼ the big regionals’ balance sheets are so large that it could be difficult to wind down such a firm in an orderly manner should one fail, top regulators have warned in recent years.

Michael Barr, the Fed’s new point man on financial regulation, signaled in a Sept. 7 speech that he is eyeing large regional banks “as they grow and as their significance in the financial system increases.” In his first public comments since taking office in July, he said that he would work with other banking regulators to boost regional banks’ so-called living wills, or plans for lenders to wind themselves down without a government bailout.

Bankers and their trade groups say extending long-term debt rules to regional firms is unwarranted, forcing banks that typically fund their operations through deposits to instead issue public debt that would ultimately increase costs for consumers and business borrowers.

“The agencies have yet to articulate a clear or meaningful benefit that would offset these significant costs for end users and the financial system,” said Lauren Anderson, senior vice president and senior associate general counsel at the Bank Policy Institute.

The work to address perceived risks posed by large regional banks is in its early stages and would have to be approved by the full Fed board. The Federal Deposit Insurance Corp., which typically oversees bank seizures after regulators have determined that a bank is in a perilous financial situation, has also been involved in the discussions, along with a third banking regulator, the Office of the Comptroller of the Currency.

Though any requirements that regional firms hold more long-term debt could be slimmed down from what megabanks are required to raise, they could still require regional firms to issue billions of debt over several years.

The focus on regional lenders comes on top of work regulators are separately weighing for the biggest U.S. banks, as they broadly review capital and other requirements. Mr. Barr said banks have emerged from the pandemic in strong financial shape, but signaled he may move to boost overall bank-capital levels. “Is capital in the system strong enough,” Mr. Barr said at the Sept 7 event. “It’s strong. I think the question is, ‘Is it strong enough?’”

After the 2008 financial crisis, regulators imposed tougher rules on firms whose failure could threaten the financial system because of their size, complexity and global reach. Those measures included stepped-up planning to unwind operations in the face of catastrophic losses and requirements to stockpile additional capital.

Large regional banks were exempt from some of the rules. Their growth in the past decade—often through acquisitions—has given regulators a reason to rethink that decision.

The precise group of large banks in question is unclear. Firms with at least $100 billion in assets, but excluding the biggest “systemically important” U.S. banks, collectively hold roughly $3.7 trillion in deposits, or about a quarter of the deposits in the U.S. banking system, according to FDIC data.

U.S. Bancorp, Truist and PNC, three of the largest regional firms in question, have assets of about $591 billion, $545 billion and $541 billion, respectively, as of June 30, according to the Federal Financial Institutions Examination Council. While larger than most U.S. commercial banks, that is far smaller than the $3.8 trillion held by JPMorgan, the largest bank.

U.S. Bancorp and PNC declined to comment. A Truist spokesman didn’t respond to a request for comment.

Even as the industry prepares to fight any rules to emerge from the Fed, the process could bring a sense of relief to a small group of regional banks with merger deals awaiting regulatory approval.

Michael Hsu, acting comptroller of the currency, said in April he was concerned that a recent wave of bank mergers risked creating more too-big-to-fail firms. Blocking those deals, though, would also shield the largest banks from competition, he said. He suggested that pending merger deals could be conditioned upon the merged bank agreeing to hold more “total loss-absorbing capacity” in the form of long-term debt, as well as other commitments.

Banks and their lobbyists resisted those calls, saying it wasn’t fair to apply rules selectively to firms seeking a merger and not to others of similar size and structure. Officials at the Fed and at other agencies generally agreed, the people familiar with the matter said, viewing the issue as part of a major policy that should be addressed through a transparent rule-making process, albeit one that might take years to complete.

Additional new requirements on regional firms could have the effect of encouraging greater industry consolidation, say banking lawyers. That potentially runs counter to steps that Biden-appointed regulators have taken to impose more stringent reviews of bank mergers. 

“More stringent standards often cause firms to think about whether they need to be significantly bigger to absorb the cost of compliance,” said David Portilla, a partner at law firm Cravath, Swaine and Moore LLP, which represents banks.