Regional banks could be facing stricter regulations. According to a report by the Wall Street Journal, regulators are considering extending similar rules to regional banks as those imposed on banking giants after the financial crisis of 2007 to 2009.
Regulators are concerned that regional banks have become too big and that increased regulations would keep the government from having to bail out banks in the event of a collapse. Here's what regulators are proposing and who it would affect.
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Regional banks are becoming more significant to the banking system
Regulators spared regional banks some of the more stringent requirements after the financial crisis. However, acquisitions have made some of these regional banks much larger than they were back then.
Michael Barr, vice chair of the Federal Reserve appointed by President Biden and sworn in in July, leads the charge on new potential banking regulations. Barr has made it clear he wants to expand requirements on regional banks, which are taking a more prominent role in the banking system.
Beyond globally systemically important banks like JPMorgan Chase and Bank of America, institutions with more than $100 billion in assets hold a total of $3.7 trillion in deposits, or 25% of the total banking system, according to the Federal Deposit Insurance Corp. Large regional banks that fall into this category include U.S. Bancorp, PNC Financial Services, and Truist Financial.
USB Total Deposits (Quarterly) data by YCharts
Regional banks need to be regulated "as they grow and as their significance to the financial system increases," Barr said in a recent speech, according to the WSJ. New regulations include a requirement that regional banks raise long-term debt so they can offset losses in the event of insolvency. These banks would also need to boost their so-called living wills, or plans to wind down operations without government bailouts in the event of a failure.
Here's what the bankers have to say about new regulations
Bankers and trade groups told the WSJ that extending long-term debt rules isn't necessary. They argue that regional banks typically fund their business through customer deposits, and a requirement to issue long-term debt would raise costs for consumers and borrowers.
While the regional banks noted above didn't respond to the WSJ's inquiry, testimony from bank executives before the Senate Banking Housing and Urban Affairs Committee on Sept. 21 offers some insights. The committee questioned bank chief executive officers on a range of topics, one of which centered on increasing capital requirements.
PNC CEO William Demchak told the committee that additional capital requirements would "crowd out other financings that are needed in the market" and that regulations would tie up capital funds for something other than supporting the economy "at a time when the country needs it."
Where potential regulations go from here
There's no question that regional banks have become more prominent since the financial crisis. Regulators are concerned that these banks could be difficult to wind down in the event of a failure and don't want bailouts to become the norm.
The new rules would impose burdens on regional banks if passed, which could ultimately increase costs and hurt their bottom line. Some in the industry say it could lead to even more bank mergers.
The path to making these rules would likely go through a formal rule-making process led by the Federal Reserve. According to the WSJ, the work to address these risks is still in the early stages and would need to be approved by the entire Federal Reserve Board.
