This year’s bank failures are giving FDIC Chair Marty Gruenberg a chance to say, “I told you so.” Nearly four years ago, in between stints as Obama and Biden’s FDIC chair, Gruenberg said in a Brookings Institution speech that the wind-down of large regional lenders posed an “underappreciated risk,” in part because of the banks’ reliance on uninsured deposits. He suggested that a way to protect the economy from a messy regional bank collapse would be to require the lenders to hold debt that could absorb losses when they fail. Now, with the economy rattled by three regional bank failures this year, Gruenberg is set to double down in a follow-up Brookings speech this afternoon. It carries new weight post-SVB, with regulators close to proposing regulations reflecting his 2019 call to action. (Brookings is touting his earlier warning as “prophetic.”) So why do Gruenberg and his allies want to force regional banks to hold more debt? Bank capital buffers — funds derived from shares issued to stockholders and money that lenders retain in earnings — generally get wiped out when the companies collapse. But debt issued by banks can last longer, providing an extra cushion when a failed bank is being sold or dismantled. It could also make uninsured depositors less likely to flee — as they did en masse at Silicon Valley Bank — if they know creditors will bear losses ahead of them. Gruenberg in the 2019 speech talked about how he saw this in action when Washington Mutual failed during the 2008 financial crisis. WaMu had $13.8 billion of unsecured debt available to absorb losses. If not for that pot of money, plus a ready and able buyer (JPMorgan Chase), the failure would have wiped out the Deposit Insurance Fund, and uninsured depositors would likely have had to take a loss, he said. The debt requirements already apply to the eight U.S. megabanks, and Gruenberg and his fellow regulators have been looking to cast a wider net. Since SVB’s failure, Gruenberg and Federal Reserve regulatory chief Michael Barr have publicly floated the idea of applying it to banks with more than $100 billion in assets. This idea isn’t without opposition, though, and the criticism doesn’t fall neatly along ideological lines. Former FDIC Vice Chair Tom Hoenig, who generally favored more stringent rules, never liked the idea for the megabanks. In 2016 he said it was “paradoxical” to suggest that layering on leverage would be the best way to manage the effects of excess leverage and financial vulnerability. “The goal is laudable,” he said. “But … it is fraught with problems.” Happy Monday — Anyone else already checking out what’s new at Spirit Halloween? Send tips and gossip: Zach Warmbrodt, Sam Sutton.
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