The Federal Deposit Insurance Corp. is gearing up to give banks some awaited regulatory relief.
In a speech earlier this month, acting Chairman Travis Hill discussed the agency's priorities to ease regulatory burdens for both existing and new banks. Based on his comments, banks can expect to see welcome changes related to asset thresholds, the resolution planning process and the de novo application process.
"Just because you've always done it, doesn't mean it makes sense anymore," Lawrence Kaplan, counsel and chair of Paul Hastings LLP's bank regulatory group, said in an interview. "It might have made sense at one point, but it's very appropriate to review from time to time."
Resolution planning
The FDIC on April 18 updated its approach to resolution planning for large banks and issued new FAQs related to that process after Hill alluded to such changes in his recent speech. The agency hopes the changes will allow it to more quickly market a large bank in the event of a failure, avoiding the bridge bank structure in which deposits can continue to flow out and cost the deposit insurance fund, Hill said April 8.
In the new resolution plan process, the agency is exempting banks from previous living will requirements, such as basing the plan around a hypothetical failure scenario.
Instead, the agency is asking banks to provide more information that would help it to better market the bank, such as details on digital offerings, key personnel and parts of the bank's business that are key to the franchise versus other areas, such as business lines or asset portfolios, that could be divested and sold on their own.
"This is a different approach than the previous administration's kitchen sink approach to thinking about risk," said Max Bonici, a partner who advises financial institutions on regulation, supervision and enforcement at Davis Wright Tremaine LLP.
Providing more information on specific offerings like digital services "reflects that institutions may provide for unique services and thus they need to address such unique factors to avoid an outflow of customers who may fear the products and services may not be offered after a resolution," Kaplan of Paul Hastings wrote in an email.
The agency will also cease handing out credibility determinations with regard to banks' plans, instead focusing more on the quality and thoroughness of the plan, according to the FAQs. Advisers worry that change opens the door for too much interpretation.
"Which personnel at the FDIC will be making that judgment call, and how knowledgeable/commercial/pragmatic will they be?" said Klaros Capital managing director Kevin Stein, a former associate director at the FDIC who worked on resolutions and a bridge bank.
Still, advisers said it was high time for the agency to update its living will standards following the failures of two large banks in March 2023.
"At the end of the day, these should be rough outlines of what will happen, but not focused on what every little teller will do in case of an emergency," Kaplan said. "It's a good opportunity to say, 'Are we collecting the correct information?'"
Asset thresholds
One major change that has yet to be officially announced but was alluded to by Hill is raising various asset thresholds for discretionary oversight. Some asset thresholds are statutory and would require changing by Congress, such as being subject to the Durbin amendment and oversight by the Consumer Financial Protection Bureau once a bank hits $10 billion.
However, banks can expect higher asset thresholds for categories that determine regulatory requirements, such as certain capital requirements, stress testing and liquidity ratios.
Hill suggested the thresholds should be adjusted for inflation. For example, the $100 billion threshold is now about $124 billion based on inflation, he said. But some industry observers would like to see higher adjustments.
Christopher Marinac, director of research at Janney Montgomery Scott LLC, said he wants to see the $10 billion and $50 billion thresholds doubled.
One adviser wants the FDIC to go even further than just raising thresholds.
The FDIC should consider establishing built-in scaling factors that change over time, making it "a lot easier for the regulators to keep the regulations, at least on a high level, appropriately tailored," Matthew Bornfreund, partner at Troutman Pepper Locke LLP and former attorney at the Federal Reserve Board, said in an interview.
The agency should also consider establishing a new threshold between the current Category II, which includes banks between $250 billion and $700 billion in assets, and Category III, banks with between $100 billion and $250 billion in assets.
"There probably should just be another threshold," Bornfreund said. "Part of the difficulty is that there's just too much of a gap between the G-SIBs, the super-regionals and the next tranche down."
De novo bank formation
In addition to easing burdens on existing banks, Hill wants the FDIC to make new bank formation easier.
One major hurdle for de novo banks is the initial capital needed to start the bank. That minimum number has crept up in recent years, turning de novo hopefuls away from the new bank process and pushing them instead to M&A.
"I'm hoping that they consider alternatives for different or lower capitalization at the start of a de novo bank," Bornfreund said. "To me, the requirement that all three years of capital be put in upfront is a significant burden to de novo formation."
The breadth of information needed, regulators' openness to de novo applications and the speed at which they move through the process are other hurdles the agency should address if it wants to encourage more new banks, said Stein of Klaros.
"In the last administration, it was almost impossible to get through" the de novo application process, he said.
