FDIC to Ease Banks’ Living-Will Mandates, Acting Chair Says
(Bloomberg) — Travis Hill, acting chair of the Federal Deposit Insurance Corp., says the agency will waive a requirement in banks’ so-called living wills so they’re no longer built around a hypothetical failure scenario.
Instead, the regulator will look for updated resolution plans focused “more specifically on providing the FDIC the information it needs to rapidly market the institution and, if needed, operate the institution for a short period of time,” Hill said in prepared remarks for an American Bankers Association event on Tuesday.
The agency also will place less emphasis on discussion over strategy about how a collapsing lender transitions into an FDIC-authorized bridge bank, which operates the firm until an acquirer is identified. The new guidance will arrive in coming days, and the living wills are due this fall.
Hill says the changes are needed to avoid the sizable deposit runs that occurred after the collapse of Silicon Valley Bank in March 2023 while it operated as a bridge bank. Similarly, Signature Bank’s post-receivership losses that same month represented just under half of the deposits at the firm at the time it failed, he said.
In both cases, the deposit losses reduced the failed institutions’ value and increased the costs to the Deposit Insurance Fund, Hill said.
“This ‘melting ice cube’ problem is a common feature of bridge banks and conservatorships, given that many customers and counterparties will always question whether it is worth continuing to do business with an institution that has just failed and has a highly uncertain future,” he said. “Furthermore, prolonged turmoil can potentially be destabilizing to the banking industry and the broader economy.”
The FDIC’s goal should be increasing the likelihood of a good resolution, which is generally a weekend sale, Hill said.
A speedy acquisition of a failing firm isn’t always possible and, in that case, the agency should be ready to pursue a sale of parts of the bank as quickly as possible, he said.
In July 2024, the FDIC and the Federal Reserve adopted final guidance that aimed to ensure US lenders can be dissolved smoothly and quickly following any collapse. It was a part of the regulators’ response to the rapid failures of SVB and Signature Bank.
That plan didn’t address all the lessons from the failures, like the costliness of operating a bridge bank over the first weekend of a lender’s collapse, Hill said.
“Overall, we hope to be much better prepared in the event that a large bank fails in the future, and to be able to resolve it in a much more cost-effective manner,” he said.
–With assistance from Christopher Condon.
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