Community Banks Call for Rules Upgrade on Larger Rivals

Large regional banks should be subject to the same rules as global systemically important banks, according to the Independent Community Bankers of America (ICBA).

The Federal Reserve Board and Federal Deposit Insurance Corporation are consulting on the potential rule change, which would affect national and regional banks with more than $250 billion in assets, or classed as Category II or Category III organizations by the Fed.

The ICBA said raising the regulatory requirements for larger banks would enhance financial stability, reduce the potential impact on the Deposit Insurance Fund, and “mitigate some of the concerns regarding excessive concentration in the banking system”.

“The biggest regional banks are large and complex enough that they should be required to maintain long-term debt with characteristics similar to those required for global systemically important banking organizations,” said ICBA president and CEO Rebeca Romero Rainey.

“This would reduce the chances that the failure of any one or more of these institutions would overwhelm the Deposit Insurance Fund, destabilize our financial system, and require extraordinary intervention by the government — reducing the risks posed by too-big-to-fail institutions.”

The rules in question govern how banks should be organized to manage an orderly “resolution” in the event of bankruptcy or similar event, to reduce the chances of contagion within the financial system and lessen the likelihood of government bailouts being needed.

Currently, only “global systemically important banks” — Category I, according to the Fed’s definitions — are required to maintain minimum levels of long-term debt and “total loss-absorbing capacity”. These banks are also subject to a surcharge for risk-based capital, and an enhanced supplementary leverage ratio.

The proposed rule change would extend these requirements to apply to all banks classified as Category II or III banks. While this mostly applies to banks with more than $250 billion in total assets, smaller banks could be affected if they have significant levels of non-bank assets, short-term funding, or “off balance sheet exposure”.

The ICBA was responding to the agencies’ call for comment on the proposal, first published on October 24, 2022.