On Tuesday, U.S. regulators unveiled a plan to compel regional banks to issue long-term debt and strengthen their “living wills” as precautionary measures to safeguard the public in the event of further bank failures. The new requirements would apply to American banks holding assets of at least $100 billion. These banks would be required to maintain a layer of long-term debt designed to absorb losses in case of government intervention. This initiative was jointly announced by the Treasury Department, the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corp. These measures are part of the regulatory response following a crisis in regional banking that emerged in March, resulting in the failure of three institutions and negatively impacting the financial performance of many others. In July, the regulatory agencies had already introduced a comprehensive set of proposals aimed at increasing capital requirements and standardizing risk models within the industry.

According to the most recent proposal, affected banks will need to maintain levels of long-term debt equivalent to either 3.5% of their average total assets or 6% of their risk-weighted assets, depending on which requirement is higher. The FDIC also specified that banks should avoid holding the debt of other institutions to minimize the risk of contagion. The agencies acknowledged that these requirements will lead to “slightly increased funding expenses” for regional banks. This may contribute to the industry’s existing earnings challenges, especially following credit rating downgrades by all three major rating agencies affecting certain lenders earlier this year.