The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Stephen Gandel

NEW YORK, May 1 (Reuters Breakingviews) - A top U.S. bank regulator wants to make it simpler for troubled lenders to give up the ghost. The Federal Deposit Insurance Corporation announced changes to living wills, documents maintained by roughly 50 of the largest banks spelling out how they could be unplugged from the financial system if they fail. Beefed up after Silicon Valley Bank’s collapse in 2023, the agency’s acting head says that predecessors learned “the wrong lessons” from the ensuing turmoil. It may well save costs, but could compound other problems.

Some 379 institutions have failed since 2010. Containing these blow-ups cost the FDIC, which insures customer deposits, a total of $67 billion. That’s equivalent to about 11.5% of the total deposits held by those toppled lenders, far above the 2.6% average over the 15 years prior.

Post-crisis reforms authorized the FDIC to take over stumbling lenders by folding them into a government-run bridge bank, offering breathing room before finalizing a sale. The agency did this for both SVB and Signature Bank, which cost $19.4 billion and $2.7 billion, respectively. First Republic, 2023’s third major failure, sold directly to JPMorgan. Costs there were $3 billion lower than with SVB, despite it being the bigger institution.

Current FDIC head Travis Hill is cutting requirements that living wills set out strategies for establishing a bridge bank, hoping to end the practice. He touts potential cost savings, plausible given the data. But the alternative is shutting a lender’s doors and concluding a sale process extremely quickly.

Such rapid processes, though, favor large banks, which already hold required regulatory licenses and are best equipped to pounce in a crisis. Orderly, longer timetables should theoretically increase participation from buyers without these advantages, winning higher prices to offset costs borne by the FDIC.

Other tweaks could help. Porticoes, which resembles a blank-check firm but only for failed banks, got approval from regulators in late 2023. Giving other buyout funds pre-emptive authorization to acquire financial institutions would allow more rapid engagement. Another option is to revive open bank resolutions, in which the FDIC assists a lender without kicking out its owners. This tool was scrapped in the 1990s after the savings and loan crisis fomented bailout backlash. But its use in the case of Continental Illinois, at the time the biggest bank blow-up ever, ultimately cost just 4% of deposits.

Hill says he is talking to buyout shops and others, rather than planning to hand every troubled bank to a bigger lender. If efforts stop here, though, entreaties may not be enough. There are now roughly 4,400 banks in the US, down from just over 14,000 in the mid-1980s. Without further changes, that consolidation wave will keep rising.

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CONTEXT NEWS

The Federal Deposit Insurance Corporation, which oversees the resolution of failed banks, on April 18 scaled back requirements for the biggest lenders to maintain documents known as living wills. The changes will make it harder for the FDIC to temporarily take over a failed bank before selling it.

(Editing by Jonathan Guilford and Maya Nandhini)

((For previous columns by the author, Reuters customers can click on GANDEL/ stephen.gandel@thomsonreuters.com))