Yale School of Management – Greg Feldberg and Carey Mott | July 6, 2023: “The FDIC could have saved $13.6 billion in the recent failures of three large banks if regulators had earlier held the banks to the total loss-absorbing capacity (TLAC) standard, based on reasonable assumptions. Over the past few months, US regulators resolved three large, failed banks: Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank. The FDIC estimated that coverage of uninsured depositors, discounts on the purchase price of the banks, and potential losses on the assets it assumed would cost its Deposit Insurance Fund (DIF) a total of $31.5 billion, roughly half of which it will recoup later from other large banks. We estimate that the FDIC could have saved $13.6 billion by imposing losses on other creditors of the failed banks if US regulators had held the banks to a modified version of an existing international standard known as total loss-absorbing capacity, or “TLAC,” based on reasonable assumptions.. In the wake of recent bank failures—all three of which were below this $250 billion threshold—the Biden Administration renewed calls to apply the long-term debt requirement to more US banks. On a recent earnings call, PNC Financial CEO Bill Demchak said, “TLAC, I think, is a certainty at this point” for his $550 billion bank, yet uncertainty remains about “how much it will be and whether it’s varied as a function of size and complexity of a bank.” Although regulators have not yet proposed a new threshold, FDIC Chair Martin Gruenberg noted at the time of the 2022 proposal that the agency was considering the challenges posed by banks with $50 to $100 billion in assets. In 2019, Paul Tucker, former Deputy Governor of the Bank of England, and former FDIC Chair Sheila Bair submitted a letter to Jerome Powell and FDIC Chair Jelena McWilliams, encouraging them to impose long-term debt (LTD) requirements on all US regional banks. There is now growing speculation that regulators could seek to apply the rule to the 20 or so domestic banks with more than $100 billion in assets. The regulators’ proposal last year did not provide details about how they might adjust the TLAC rule to smaller banks. The recent bank resolutions offer an opportunity to study how a revised rule might have worked if it were already in place…”