Bank Debt Proposal Poses a Test for Regulators
Forcing large regional lenders to issue long-term bonds will give them sturdier funding. But will it really help in a crisis?
Their debts came due.
Photographer: Anna Rose Layden/Bloomberg
Banks borrow to finance most of their business. But when those loans can be pulled almost instantly – as was the case with Silicon Valley Bank’s deposits in March – executives and regulators have few options to stem the panic. A new proposal aims to address that problem by requiring banks to lock in more of their funding for at least one year. It’s a worthwhile idea, with an important caveat.
The US already has a similar requirement for the country’s biggest lenders, the so-called globally systemically important banks. Now regulators want to mandate that federally insured lenders with $100 billion or more in assets issue long-term debt to finance a specified minimum percentage of the total. They’ll allow three years to comply, a sensible timeline, and estimate the effect on net interest margin to be between 0.03 to 0.12 percentage points, a manageable cost for most lenders. One result is that if a bank fails and its equity is wiped out, bondholders would absorb additional losses, making it less likely that uninsured depositors would be at risk.