Summarize in up to four sentences.: How new bank rules could create a two-tiered banking system
Julie Hyman and Stephanie Mikulich
Tue, September 5, 2023 at 12:00 p.m. EDT
The Federal Deposit Insurance Corporation, or FDIC, unveiled new regulations that will require banks with at least $100 billion in assets to issue enough long-term debt to absorb losses in case of a potential seizure. American Banker Washington Bureau Chief John Heltman explains to Yahoo Finance Live how these new regulations could potentially create a two-tiered banking system. Heltman says that these rules will include many midsized to large banks and effectively would increase "the pressure to merge." Heltman goes on to note that the rules wouldn't impact small banks, basically creating a two-tiered system.

Video Transcript
- Regulators unveiling a new set of bank rules last week that would require lenders with at least $100 in assets to issue enough long term debt to absorb losses in case of a potential seizure. The proposal from the Federal Deposit Insurance Corporation or FDIC is designed to prevent the systemic worries that roiled the US banking system earlier this year when several mid-sized lenders like Silicon Valley Bank and Signature Bank collapsed.

Our next guest says the regulatory overhaul for large and mid-sized banks could lead to stronger pressure for those banks to merge in the coming years, leaving smaller banks arguably less stable. Joining us now, John Heltman, Washington Bureau Chief for American Banker. And John, as you write, this could create sort of a two-tiered system. I mean, I guess you could say we already have one, but this would make it even more acute. Walk us through how that would happen.

JOHN HELTMAN: Thank you, Julie. So this is a little bit of a thought exercise, right? So we have, again, the rules that were proposed last week from the FDIC, the Fed, and the SEC. We also last month had capital rules that were proposed by the same regulators that would effectively raise capital, especially for the largest banks.

And there's still more to come. There's Community Reinvestment Act overhaul that will probably end up costing more money for banks. The CFPB has been working on rules on late fees, thus restricting late fee income, and on data collection and some other things.

And in addition to all this, we're in a landscape where interest rates are making kind of interest rate margins tighter. Loan demand is lower. And because loan demand is lower and there are all these underwater assets or underwater treasuries that led to the demise of Silicon Valley Bank and others earlier this year, it's just making things a little tighter for banks in a general way.

And the banks that are best situated to weather that tightness are larger banks. And so by expanding these rules to include a broader swath of banks, it's going to apply that same kind of economic pressure to a bigger group of banks in the kind of mid-size to large range. And that pressure will lead many of those banks to say, well, you know we'd probably be better off if we had a bigger base from which to draw, thus increasing the pressure to emerge.

I'll also note--

- Sorry. Go ahead.

JOHN HELTMAN: I was just going to say. It's worth noting that all of these rules don't apply to small banks, which represent the majority of all banks in the banking industry, thus creating the kind of two-tiered effect that I described in the piece.

- And so the passthrough to credit conditions right now, how much more difficult does it make the environment in credit conditions?

JOHN HELTMAN: The economic kind of credit condition thing is I think largely a outgrowth of interest rate increases. That's that is by design. You raise interest rates in order to make cash or to make money more expensive, harder to borrow, or more expensive to borrow. Thus presumably weeding out maybe more speculative kinds of loan investments but in general, just making everything kind of cool down.

So that effect is sort of happening independently of this regulatory push that we're now experiencing that is very much informed by the failures from earlier this year. But it does make everything kind of harder because it means that, again, if you have these loans on the books that aren't really competitive in this interest rate environment, it's harder to get new loans that are competitive in this interest rate environment, to like replace them or to kind of float them a little bit.