The Federal Reserve Board ("FRB"), the FDIC and the Office of the Comptroller of the Currency ("OCC") proposed requiring U.S. global systemically important banking organizations ("GSIBs") to hold additional capital against the holdings of total loss-absorbing capacity ("TLAC") debt issued by other GSIBs.
Under current rules, GSIBs are required to issue debt pursuant to the FRB's TLAC rule. The proposal would discourage GSIBs from purchasing significant amounts of TLAC debt issued by other GSIBs. In particular, banking organizations that follow the "advanced approaches" capital framework would be required to deduct fully from their Tier 2 capital any significant investment in or reciprocal cross-holding of covered debt instruments, and any direct, indirect or synthetic investment in the banking organization's own covered debt instrument. However, the proposal provides an exception for debt that is held for five or fewer business days in connection with bona fide underwriting activities.
The proposal would also (i) modify regulatory reporting requirements stemming from the proposal and (ii) mandate banking organizations, subject to certain TLAC and long-term debt ("LTD") requirements, to disclose their TLAC and LTD issuances.
Further, the proposal is intended to limit the "interconnectedness" of large banking organizations and minimize the impact from a failure of the largest banking organizations. The proposal would supplement other measures that the agencies have already taken to limit interconnectedness.
Comments must be submitted to the agencies no more than 60 days following publication of the proposal in the Federal Register.
Commentary / Mark Chorazak
The proposal, if adopted, will limit the liquidity and marketability of TLAC-qualifying debt instruments. However, these concerns are clearly secondary to what the banking agencies are attempting to achieve by this proposal. The risk of contagion among the largest banks is exacerbated if the banks are permitted to hold the TLAC debt of their closest peers. This proposal appears to be a logical step to reduce this risk.
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