The recent regulatory actions aimed at ensuring the safeguarding of deposited funds have posed significant challenges for mid-sized lenders already grappling with an existential crisis. Federal banking regulators remain resolute in their determination to prevent a repeat of the complexities faced while ensuring the security of Silicon Valley Bank and First Republic Bank.
In a bid to mitigate future risks, they are now placing additional burdens on these banks: the requirement to sell substantial amounts of long-term debt, regardless of the cost, to suitable buyers, excluding other regional lenders.
The New Requirements:
As per a joint notice from the Treasury Department, Office of the Comptroller of the Currency, Federal Reserve, and Federal Deposit Insurance Corp, American banks with assets exceeding $100 billion must hold a layer of long-term debt to absorb potential losses in the event of government seizure. Affected banks will be obligated to maintain long-term debt levels equivalent to 3.5% of average total assets or 6% of risk-weighted assets, depending on which figure is higher.
Impact on Mid-Sized Banks:
These new rules are expected to further squeeze margins for mid-sized banks, which are already struggling with rising funding costs. Analysts estimate that this group could experience an annual earnings reduction of up to 3.5% due to these regulatory demands. The potential consequences of these requirements are far-reaching, extending beyond financial implications to broader considerations affecting the banks’ ability to serve their customers effectively.
Banks in Focus:
Among the regional banks likely to be impacted, five institutions stand out. According to analysts, Regions, M&T Bank, Citizens Financial, Northern Trust, and Fifth Third Bancorp may collectively need to raise approximately $12 billion in fresh debt to meet the new obligations.
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