Federal regulators are strongly considering requiring regional and mid-sized banks to issue billions of dollars in long-term debt to guard against more bank failures.

This onerous requirement will be difficult and costly for banks: it comes at a time when rising interest rates and commercial real estate losses are squeezing banks, and one group of analysts predicts annual earnings hits of as much as 3.5% from the proposed regulation.

The Long-term Debt Proposal would affect banks with more than $100 billion in assets and require them to maintain long-term debt levels of 3.5% of average total losses or 6% of risk-weighted losses, whichever is higher, according to a joint notice from the nation’s top bank regulators – the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC).

The notice has extensive details on institutions subject to the proposal, as well as requirements. We encourage you to review thoroughly. Regulators are seeking public comments on the proposal by Nov. 30, 2023.

Under the proposal, the banks would have three years from the rule’s adoption to raise their long-term debt issuance by roughly $70 billion. This will help to absorb losses in the event of a government seizure. Banks will be discouraged from holding the debt of other lenders to reduce contagion risk, the regulator said.

The proposal also requires banks to bolster their resolution plans – known as “living wills” – that take effect in the event of a bank failure. Regulators want more detail ensuring key data makes it into the hands of regulators or prospective buyers so failed banks can be operated safely by the FDIC or sold off in pieces.

Proposal Comes After Bank Failures

Regulators submitted the proposal in response to three bank failures in March 2023, including Silicon Valley Bank, that forced regulators to step in and back deposits, as well as sell the banks. Regulators feel the crisis revealed smaller banks need the same rules as the larger global systemically important banks, which already have long-term debt requirements.

This is also the second response to the spring bank collapses. In July, the regulators boosted capital requirements for all banks with at least $100 billion in assets with a comprehensive set of proposed changes.

Critics of the proposal included two members of the Federal Reserve Board of Governors, who said it is too onerous for the regional banks and could actually put them at risk of failure.

The proposal will likely increase the cost of capital for banking organizations that fund themselves with low-cost deposits. They’d also be forced to issue the debt in an unfriendly lending environment.

The Harris Beach Financial Institutions and Capital Markets team is tracking these proposals. If you have questions about this subject or related matters, please reach out to attorney Tyler A. O’Reilly at (585) 419-8634 and toreilly@harrisbeach.com, attorney Mathew P. Barry at (518) 701-2768 and mbarry@harrisbeach.com, or the Harris Beach attorney with whom you most frequently work.

This alert is not a substitute for advice of counsel on specific legal issues.

Harris Beach has offices throughout New York state, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as Washington D.C., New Haven, Connecticut and Newark, New Jersey.