Forcing large regional lenders to issue long-term bonds will give them sturdier funding. But...

But will it really help in a crisis?

Banks borrow to finance most of their business. But when those loans can be pulled almost instantly – as was the case with Silicon Valley Bank’s deposits in March – executives and regulators have few options to stem the panic. 

Now regulators want to mandate that federally insured lenders with $100 billion or more in assets issue long-term debt to finance a specified minimum percentage of the total. 

Debtholders would be motivated to monitor banks’ financial health closely, so a sudden drop in bond prices would signal emerging concerns.

Imposing losses on bondholders, even those who have been warned and compensated for the risk that they might not get all their money back, can create added stress on markets.

Regulators should know by now that equity capital is the only type of funding that can reliably absorb losses — and they should require more of it. 

The Editorial Board Bloomberg 19 september 2023


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