FDIC studying plan to include smaller U.S. banks in Basel III capital requirements after failures in early 2023

By Steve Gelsi

The chairman of the Federal Deposit Insurance Corp. said Thursday that U.S. regulators are considering a plan to include banks with assets as low as $100 billion in the international regime for capital requirements known as Basel III.

Currently, only banks with $250 billion or more in assets fall under the umbrella of Basel III, which was set up in the wake of the Global Financial Crisis that erupted in 2008.

FDIC Chairman Martin Gruenberg said it's possible that Silicon Valley Bank may not have failed if it fell under Basel III rules.

While the bank's collapse in March came after a liquidity crunch and a run on deposits, the loss of public confidence that took place before the fatal run was prompted its sale of securities at a loss to cover withdrawals. This in turn has raised questions about the bank's capital adequacy, he said.

"Had the unrealized losses on available for sale securities on the balance sheet of SVB, that were realized once sold, been required to be recognized in capital, as the Basel III framework would do, it might have averted the loss of market confidence and the liquidity run," Gruenberg said in a speech at the Peterson Institute. "That is because there would have been more capital held against these assets."

Gruenberg said the Silicon Valley Bank bust showed that banks of $100 billion to $250 billion of assets "can pose genuine financial stability risks and the federal banking agencies need to review carefully the supervision of these institutions, particularly for interest rate risk in the current environment, and the prudential requirements that apply to them, including capital, liquidity, and loss absorbing resources for resolution."

Community banks would not be included in the Basel III proposal due to their limited overall size and trading activities, he said.

Meanwhile, bank stocks fell on Thursday, with the SPDR S&P Regional Banking ETF (KRE) down 3.6%, the KBW Nasdaq Bank Index off by 2.3% and the Financial Select Sector SPDR Fund (XLF) down by 1%.

Based on a list published by S&P Global of the largest 50 U.S. banks by total assets as March 31, 18 U.S. banks falling within the range of $100 billion to $250 billion of assets including American Express Co. (AXP) with $236 billion of assets, Citizens Financial Group Inc. (CFG) with $222 billion in assets, First Citizens Bancshares (FCNCA) with $215 billion, Fifth Third Bancorp (FITB) with $209 billion and M&T Bank Corp. (MTB) with $203 billon.

On the smaller end of the 18 banks, Synchrony Financial (SYF) has disclosed $108 billion in assets, New York Community Bancorp. (NYCB) has $124 billion and Northern Trust Corp. (NTRS) has $151 billion.

The FDIC will issue proposed rulemaking to continue implementing Basel III requirements, followed by a comment period and finalization of the rules and a transition period that will last several years.

While banks have complained that capital requirements will cause banks to lend less and hurt the economy, Gruenberg said the opposite is true because the moves will strengthen the financial system in times of stress.

"Ensuring adequate amounts of bank capital provides a long-term benefit to the economy by enabling banks to play a counter-cyclical role during an economic downturn rather than a pro-cyclical one," he said. "Equity capital funds a bank's operations, is allocated to make loans to local communities, and can be distributed to shareholders when appropriate with sound financial performance."

The FDIC will team up with the Federal Reserve and the Office of the Comptroller of the Currency to issue a notice of proposed rulemaking "in the near term," he said.

Meanwhile, on another regulatory front, the Department of Justice is reviewing its policies regarding bank mergers.

Federal officials have said that consolidation among banks will likely continue but it's important for the U.S. banking system to remain diverse, with healthy community banks, regional banks, and megabanks, while protecting competition.

Also Read: Justice Department to weigh updating banking-industry competition rules

-Steve Gelsi

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06-22-23 1142ET

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