Banking Regulators Reveal Proposed New Rules to Raise Debt Issuance for Banks

American banks with at least $100 billion in assets will have to issue debt to protect creditors in the case of potential bank failures, federal regulators announced Tuesday.

Under the new rules, banks will be required to carry long-term debt in order to cover losses if the institution is seized by the government, according to a joint statement from the Federal Deposit Insurance Corporation, Treasury, Office of the Comptroller of the Currency and Federal Reserve.

The rules come as regulators attempt to cushion banks and protect depositors following a string of regional bank collapses earlier this year that included Silicon Valley Bank, Signature Bank and First Republic Bank.

The regulators said the proposal would help absorb losses in case of failure and would mitigate risks of contagion to other institutions, limiting the potential of a widespread banking crisis.

The proposed rules would raise long-term debt issuance requirements that currently apply only to the largest banks, to midsize institutions, such as those involved in the regional crisis. The banks will be required to maintain long-term debt that is the higher of 6% of their total risk-weighted assets or 3.5% of their average total assets.

"The proposed rule, if fully implemented at the time of the failure of these firms, would have provided billions of dollars of additional loss-absorbing capacity," according to the document.

The agencies concluded in the note that the proposal will "moderately increase funding costs" for the institutions.

Earlier this month, S&P Global Ratings downgraded five U.S. banks and lowered its outlook for several others, following Moody’s downgrade of 10 small and mid-size banks.

Moody's attributed the downgrades to several strains on the U.S. banking sector, including funding pressures, regulatory capital weakness and rising risks associated with commercial real estate exposures.

Morgan Stanley analyst Vishy Tirupattur wrote in an Aug. 16 research note that the proposal could pose new challenges for smaller banks. Namely, institutions would have less capital on hand for lending, which could impact credit availability and overall economic growth.