Federal bank regulators are seeking public input on a proposal that would compel large banks with over $100 billion in assets to maintain a layer of long-term debt. This measure aims to enhance financial stability by improving the ability of these institutions to be resolved and their resilience in times of crisis.
The proposal comes as a result of a previous notice issued in October 2022 by the Federal Reserve Board and the Federal Deposit Insurance Corporation, which examined various potential changes, including the introduction of a long-term debt requirement to facilitate smoother resolutions for large banks. The recent failures of three major banks have highlighted the need for additional resources that regulators can employ to resolve banks more efficiently and mitigate the risks and costs associated with disruptions to the banking system.
Implementing a mandatory minimum amount of long-term debt for each large bank would expand the options available for resolving these institutions in the event of failure. Furthermore, by reducing the vulnerability of uninsured depositors to losses, long-term debt can mitigate the likelihood and severity of bank runs, as well as minimize the risk of contagion during times of stress.
This proposal specifically targets the risks associated with large banks that are not classified as globally systemically important banks (GSIBs), and it would not have a significant impact on the existing requirements already applicable to GSIBs. Additionally, the proposal would prohibit large banks from engaging in certain activities that could complicate their resolution, and it would discourage these banks from holding long-term debt issued by other institutions in order to reduce interconnectedness and contagion within the banking system.
Under the proposal, there would be a three-year transition period, during which certain outstanding long-term debt could be considered toward meeting the minimum requirements. This provision is meant to allow banks sufficient time to adapt to the specifications required for eligible long-term debt instruments.
Comments regarding the proposal must be submitted by November 30, 2023.
For more information, refer to the Board Memo (PDF), Fact Sheet (PDF), Federal Register notice: Long-Term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions (PDF), as well as the statements by Governor Michelle W. Bowman and Governor Christopher J. Waller.
Media Contacts:
– Federal Reserve Board: Meg Nelson, 202-909-7653
– FDIC: Carroll Kim, 202-898-7389
– OCC: Stephanie Collins, 202-649-6870
Read the original Federal Reserve release here.
