Bank regulators embark on living will guidance for the largest non-GSIBs

WASHINGTON — Two major banking regulators say they "anticipate" giving the largest regional banks guidance on resolution plans. 

The move marks a big step forward for the Federal Deposit Insurance Corp. and the Federal Reserve, which have been mulling how to distinguish requirements for the large regional banks' living wills from those of the too-big-to-fail institutions. 

Bloomberg News

The agencies said the guidance will apply generally to banks with more than $250 billion assets.  Global systemically important banks, or G-SIBs, have already received guidance. There will be a public comment period before the guidance is finalized. 

Regulators, including acting Comptroller of the Currency Michael Hsu and acting FDIC Chair Martin Gruenberg, have advocated for strengthening large regional banks' resolvability requirements when they're going through mergers, arguing that those large regional banks have grown increasingly complicated and important to the global financial system. 

Large bank mergers have received some scrutiny from policymakers so far. In 2019 when BB&T and Suntrust received approval to form Truist, then-board member of the FDIC Gruenberg said that "it would be a serious mistake not to recognize and address the very significant financial stability risks the merged institution would present."

Tied into Fed and FDIC's announcement, the two agencies said that they found no "deficiencies" or "shortcomings" in Truist's resolution plan, which the bank is required to submit every three years as a "Category III" banking institution. 

The bank submitted a "full" instead of "targeted" resolution plan, which would otherwise be required, as part of an agreement that came along with regulatory approval for Suntrust and BB&T's deal. 

The FDIC and Fed did give the bank feedback on how it could strengthen its plan, providing clues on what kind of guidance the agencies could issue in the future. Truist's next plan is due on or before July 1, 2024. 

The bank should consider how they would set up a "bridge depository institution," which is what's used to operate an insolvent bank, and how it would be "the least costly," to the Deposit Insurance Fund. They should also plan to provide one or more exit options from the bridge depository institutions, and should consider the liquidity needed to go through a resolution process. 

"These and other potential improvements to resolvability are appropriate topics for this future resolution planning guidance," the agencies said in their feedback to Truist. 

The agencies will "endeavor" to finalize the guidance one year before the next resolution plan deadline for banks that need to file every three years. Since that deadline is July 2024, that puts the Fed and FDIC's timeline at about July 2023.