FDIC’s Resolution Rule Spotlights Specter of Large Bank Failures and Megamergers

Last year marked a seismic shift in financial services — as five bank failures tested the ways and means at the disposal of government and industry to prevent wider contagion.

Silicon Valley Bank, of course, was the arguably the headliner, representing the second largest bank failure in history. The Federal Deposit Insurance Corp (FDIC) estimated that the total assets tied to those financial institutions topped $548 billion. Silicon Valley Bank, with $209 billion in assets, was ultimately taken over by regulators.

The Story So Far

Thus far into 2024, there’s been a single failure: Pennsylvania-based Republic Bank with $6 billion in assets. That bank was in turn bought by Fulton Bank.

To that end, on Thursday, the FDIC approved a rule that would, in at least some cases, change the way large bank failures are resolved.

The FDIC rule would mandate covered banks — those with assets topping $100 billion — to offer up a resolution plan every three years, with periodic testing in place that would demonstrate the processes and safeguards are in place to continue critical processes and market the bank itself, or parts of it.

And as Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra said in a statement, the new guidelines would avoid “costly megamergers” that have been hallmarks of resolving bank failures through the past several years. Chopra also serves as a member of the FDIC Board of Directors.

Chopra’s statement noted that larger bank failures have been marked by a “smaller pool of potential bidders that would be able to purchase the firm” and the complexities of the large banks render due diligence difficult to conduct.

Breakups Rather Than Wholesale Mergers?

“Plans submitted pursuant to these rules will help the FDIC pursue other strategies, such as breaking up a failed bank into valuable components and selling it to multiple buyers or spinning the failed bank back out into private hands through an initial public offering or other transactions,” said Chopra.

There’s a technology component here, too, we note: The rule also directs the banks to be able to open up “virtual data rooms” for bidders to conduct due diligence and to have the IT structure and staff in place to break up and sell parts of the banks if necessary.

As PYMNTS reported earlier this month, the FDIC’s first-quarter assessment on the banking industry noted an increasing tally of “problem banks,” as FDIC Chairman Martin Gruenberg detailed in accompanying remarks “the number of banks on the Problem Bank List … increased from 52 in fourth quarter 2023 to 63 in first quarter 2024.” The number of problem banks represented 1.4% of total banks, which Gruenberg said was within the “normal range for non-crisis periods of 1 to 2% of all banks.”

Total assets held by problem banks increased $15.8 billion to $82.1 billion during the quarter. Typically, we note, the FDIC identifies those “problem banks” as those with operational or managerial weaknesses, “or a combination of such issues.”

In a late 2023 report, in the wake of the SVB collapse, the FDIC contended that “large concentrations of uninsured deposits, or other short-term demandable liabilities, increase the potential for bank runs and can threaten financial stability.”