Proposed Rule2023-19265
Long-Term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 19, 2023
Issuing agencies
Treasury DepartmentComptroller of the CurrencyFederal Reserve SystemFederal Deposit Insurance Corporation
Abstract
The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation are issuing a proposed rule for comment that would require certain large depository institution holding companies, U.S. intermediate holding companies of foreign banking organizations, and certain insured depository institutions, to issue and maintain outstanding a minimum amount of long-term debt. The proposed rule would improve the resolvability of these banking organizations in case of failure, may reduce costs to the Deposit Insurance Fund, and mitigate financial stability and contagion risks by reducing the risk of loss to uninsured depositors.
Full Text
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<title>Federal Register, Volume 88 Issue 180 (Tuesday, September 19, 2023)</title>
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[Federal Register Volume 88, Number 180 (Tuesday, September 19, 2023)]
[Proposed Rules]
[Pages 64524-64579]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-19265]
[[Page 64523]]
Vol. 88
Tuesday,
No. 180
September 19, 2023
Part II
Department of the Treasury
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Office of the Comptroller of the Currency
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Federal Reserve System
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Federal Deposit Insurance Corporation
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12 CFR Parts 3, 54, 216, et al.
Long-Term Debt Requirements for Large Bank Holding Companies, Certain
Intermediate Holding Companies of Foreign Banking Organizations, and
Large Insured Depository Institutions; Resolution Plans Required for
Insured Depository Institutions With $100 Billion or More in Total
Assets; Informational Filings Required for Insured Depository
Institutions With At Least $50 Billion but Less Than $100 Billion in
Total Assets; Guidance for Resolution Plan Submissions of Domestic and
Foreign Triennial Full Filers; Proposed Rules and Notices
Federal Register / Vol. 88 , No. 180 / Tuesday, September 19, 2023 /
Proposed Rules
[[Page 64524]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 3 and 54
[Docket ID OCC-2023-0011]
RIN 1557-AF21
FEDERAL RESERVE SYSTEM
12 CFR Parts 216, 217, 238, and 252
[Regulations P, Q, LL, and YY; Docket No. [R-1815]]
RIN 7100-AG66
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 324 and 374
RIN 3064-AF86
Long-Term Debt Requirements for Large Bank Holding Companies,
Certain Intermediate Holding Companies of Foreign Banking
Organizations, and Large Insured Depository Institutions
AGENCY: Office of the Comptroller of the Currency, Department of the
Treasury; Board of Governors of the Federal Reserve System; and Federal
Deposit Insurance Corporation.
ACTION: Notice of proposed rulemaking with request for public comment.
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SUMMARY: The Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation are issuing a proposed rule for comment that
would require certain large depository institution holding companies,
U.S. intermediate holding companies of foreign banking organizations,
and certain insured depository institutions, to issue and maintain
outstanding a minimum amount of long-term debt. The proposed rule would
improve the resolvability of these banking organizations in case of
failure, may reduce costs to the Deposit Insurance Fund, and mitigate
financial stability and contagion risks by reducing the risk of loss to
uninsured depositors.
DATES: Comments must be received on or before November 30, 2023.
ADDRESSES: Comments should be directed to:
OCC: You may submit comments to the OCC by any of the methods set
forth below. Commenters are encouraged to submit comments through the
Federal eRulemaking Portal. Please use the title ``Long-term Debt
Requirements for Large Bank Holding Companies, Certain Intermediate
Holding Companies of Foreign Banking Organizations, and Large Insured
Depository Institutions'' to facilitate the organization and
distribution of the comments. You may submit comments by any of the
following methods:
<bullet> Federal eRulemaking Portal--<a href="http://Regulations.gov">Regulations.gov</a>:
Go to <a href="https://regulations.gov/">https://regulations.gov/</a>. Enter ``Docket ID OCC-2023-0011''
in the Search Box and click ``Search.'' Public comments can be
submitted via the ``Comment'' box below the displayed document
information or by clicking on the document title and then clicking the
``Comment'' box on the top-left side of the screen. For help with
submitting effective comments, please click on ``Commenter's
Checklist.'' For assistance with the <a href="http://Regulations.gov">Regulations.gov</a> site, please call
1-866-498-2945 (toll free) Monday-Friday, 9 a.m.-5 p.m. ET, or email
<a href="/cdn-cgi/l/email-protection#097b6c6e7c65687d6066677a616c65796d6c7a62496e7a68276e667f"><span class="__cf_email__" data-cfemail="bfcddad8cad3decbd6d0d1ccd7dad3cfdbdaccd4ffd8ccde91d8d0c9">[email protected]</span></a>.
<bullet> Mail: Chief Counsel's Office, Attention: Comment
Processing, Office of the Comptroller of the Currency, 400 7th Street
SW, Suite 3E-218, Washington, DC 20219.
<bullet> Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218,
Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2023-0011'' in your comment. In general, the OCC will
enter all comments received into the docket and publish the comments on
the <a href="http://Regulations.gov">Regulations.gov</a> website without change, including any business or
personal information provided such as name and address information,
email addresses, or phone numbers. Comments received, including
attachments and other supporting materials, are part of the public
record and subject to public disclosure. Do not include any information
in your comment or supporting materials that you consider confidential
or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this action by the following method:
<bullet> Viewing Comments Electronically--<a href="http://Regulations.gov">Regulations.gov</a>:
Go to <a href="https://regulations.gov/">https://regulations.gov/</a>. Enter ``Docket ID OCC-2023-0011''
in the Search Box and click ``Search.'' Click on the ``Dockets'' tab
and then the document's title. After clicking the document's title,
click the ``Browse All Comments'' tab. Comments can be viewed and
filtered by clicking on the ``Sort By'' drop-down on the right side of
the screen or the ``Refine Comments Results'' options on the left side
of the screen. Supporting materials can be viewed by clicking on the
``Browse Documents'' tab. Click on the ``Sort By'' drop-down on the
right side of the screen or the ``Refine Results'' options on the left
side of the screen checking the ``Supporting & Related Material''
checkbox. For assistance with the <a href="http://Regulations.gov">Regulations.gov</a> site, please call 1-
866-498-2945 (toll free) Monday-Friday, 9 a.m.-5 p.m. ET, or email
<a href="/cdn-cgi/l/email-protection#cfbdaaa8baa3aebba6a0a1bca7aaa3bfabaabca48fa8bcaee1a8a0b9"><span class="__cf_email__" data-cfemail="07756260726b66736e6869746f626b776362746c4760746629606871">[email protected]</span></a>.
The docket may be viewed after the close of the comment period in
the same manner as during the comment period.
Board: You may submit comments to the Board, identified by Docket
No. R-1815 and RIN 7100-AG66, by any of the following methods:
<bullet> Agency Website: <a href="http://www.federalreserve.gov">http://www.federalreserve.gov</a>. Follow the
instructions for submitting comments at <a href="http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm">http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm</a>.
<bullet> Federal eRulemaking Portal: <a href="http://www.regulations.gov">http://www.regulations.gov</a>.
Follow the instructions for submitting comments.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#3c4e595b4f125f5351515952484f7c5a5958594e5d504e594f594e4a59125b534a"><span class="__cf_email__" data-cfemail="bdcfd8dace93ded2d0d0d8d3c9cefddbd8d9d8cfdcd1cfd8ced8cfcbd893dad2cb">[email protected]</span></a>. Include docket
number and RIN in the subject line of the message.
<bullet> Fax: (202) 452-3819 or (202) 452-3102.
<bullet> Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551. In general, all public comments will be made
available on the Board's website at <a href="http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm">www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm</a> as submitted, and will not be modified to remove
confidential, contact or any identifiable information. Public comments
may also be viewed electronically or in paper in Room M-4365A, 2001 C
St. NW Washington, DC 20551, between 9:00 a.m. and 5:00 p.m. during
federal business weekdays.
FDIC: You may submit comments to the FDIC, identified by RIN 3064-
AF86, by any of the following methods:
<bullet> Agency Website: <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>. Follow instructions for
submitting comments on the FDIC website.
<bullet> Mail: James P. Sheesley, Assistant Executive Secretary,
Attention: Comments/Legal OES (RIN 3064-AF86), Federal Deposit
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
<bullet> Hand Delivered/Courier: Comments may be hand-delivered to
the guard station at the rear of the 550 17th Street NW building
(located on F Street NW) on business days between 7 a.m. and 5 p.m.
[[Page 64525]]
<bullet> Email: <a href="/cdn-cgi/l/email-protection#0b686466666e657f784b4d4f4248256c647d"><span class="__cf_email__" data-cfemail="20434f4d4d454e545360666469630e474f56">[email protected]</span></a>. Include RIN 3064-AF86 on the
subject line of the message.
<bullet> Public Inspection: Comments received, including any
personal information provided, may be posted without change to <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>.
Commenters should submit only information that the commenter wishes to
make available publicly. The FDIC may review, redact, or refrain from
posting all or any portion of any comment that it may deem to be
inappropriate for publication, such as irrelevant or obscene material.
The FDIC may post only a single representative example of identical or
substantially identical comments, and in such cases will generally
identify the number of identical or substantially identical comments
represented by the posted example. All comments that have been
redacted, as well as those that have not been posted, that contain
comments on the merits of this notice will be retained in the public
comment file and will be considered as required under all applicable
laws. All comments may be accessible under the Freedom of Information
Act.
FOR FURTHER INFORMATION CONTACT:
OCC: Andrew Tschirhart, Risk Expert, Capital and Regulatory Policy,
(202) 649-6370; or Carl Kaminski, Assistant Director, or Joanne
Phillips, Counsel, Chief Counsel's Office, (202) 649-5490, Office of
the Comptroller of the Currency, 400 7th Street SW, Washington, DC
20219. If you are deaf, hard of hearing, or have a speech disability,
please dial 7-1-1 to access telecommunications relay services.
Board: Molly Mahar, Senior Associate Director, (202) 973-7360, Juan
Climent, Assistant Director, (202) 872-7526, Francis Kuo, Lead
Financial Institution Policy Analyst (202) 530-6224, Lesley Chao, Lead
Financial Institution Policy Analyst, (202) 974-7063, Tudor Rus, Lead
Financial Institution Policy Analyst, (202) 475-6359, Lars Arnesen,
Senior Financial Institution Policy Analyst, (202) 452-2030, Division
of Supervision and Regulation; or Charles Gray, Deputy General Counsel,
(202) 872-7589, Reena Sahni, Associate General Counsel, (202) 452-3236,
Jay Schwarz, Assistant General Counsel, (202) 452-2970, Josh Strazanac,
Counsel, (202) 452-2457, Brian Kesten, Senior Attorney, (202) 475-6650,
Jacob Fraley, Legal Assistant/Attorney, (202) 452-3127, Legal Division;
For users text telephone systems (TTY) or any TTY-based
Telecommunications Relay Services, please call 711 from any telephone,
anywhere in the United States; Board of Governors of the Federal
Reserve System, 20th Street and Constitution Avenue NW, Washington, DC
20551.
FDIC: Andrew J. Felton, Deputy Director, (202) 898-3691; Ryan P.
Tetrick, Deputy Director, (202) 898-7028; Elizabeth Falloon, Senior
Advisor, (202) 898-6626; Jenny G. Traille, Acting Senior Deputy
Director, (202) 898-3608; Julia E. Paris, Senior Cross-Border
Specialist, (202) 898-3821; Division of Complex Institution Supervision
and Resolution; R. Penfield Starke, Acting Deputy General Counsel,
<a href="/cdn-cgi/l/email-protection#5a28292e3b28313f1a3c3e3339743d352c"><span class="__cf_email__" data-cfemail="285a5b5c495a434d684e4c414b064f475e">[email protected]</span></a>; David Wall, Assistant General Counsel, (202) 898-
6575; F. Angus Tarpley III, Counsel, (202) 898-8521; Dena S. Kessler,
Counsel, (202) 898-3833, Legal Division, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction and Overview of the Proposal
A. Background and Introduction
B. Overview of the Proposal
II. Advance Notice of Proposed Rulemaking
III. LTD Requirement for Covered Entities
A. Scope of Application
B. Covered Savings and Loan Holding Companies
C. Calibration of Covered Entity LTD Requirement
IV. LTD Requirement for Covered IDIs
A. Scope of Application
B. Calibration of Covered IDI LTD Requirement
V. Features of Eligible LTD
A. Eligible External LTD
B. Eligible Internal LTD
C. Special Considerations for Covered IHCs
D. Legacy External LTD Counted Towards Requirements
VI. Clean Holding Company Requirements
A. No External Issuance of Short-Term Debt Instruments
B. Qualified Financial Contracts With Third Parties
C. Guarantees That are Subject to Cross-Defaults
D. Upstream Guarantees and Offset Rights
E. Cap on Certain Liabilities
VII. Deduction of Investments in Eligible External LTD From
Regulatory Capital
VIII. Transition Periods
IX. Changes to the Board's TLAC rule
A. Haircut for LTD Used to Meet TLAC Requirement
B. Minimum Denominations for LTD Used to Satisfy TLAC
Requirements
C. Treatment of Certain Transactions for Clean Holding Company
Requirements
D. Disclosure Templates for TLAC HCs
E. Reservation of Authority
F. Technical Changes To Accommodate New Requirements
X. Economic Impact Assessment
A. Introduction and Scope of Application
B. Benefits
C. Costs
XI. Regulatory Analysis
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Riegle Community Development and Regulatory Improvement Act
of 1994
D. Solicitation of Comments on the use of Plain Language
E. OCC Unfunded Mandates Reform Act of 1995 determination
F. Providing Accountability Through Transparency Act of 2023
I. Introduction and Overview of the Proposal
A. Background and Introduction
Following the 2008 financial crisis, the Office of the Comptroller
of the Currency (OCC), Board of Governors of the Federal Reserve System
(Board), and Federal Deposit Insurance Corporation (FDIC and, together
with the OCC and the Board, the ``agencies'') adopted rules and
guidance, both jointly and individually, to improve the resolvability,
resilience, and safety and soundness of all banking organizations. The
agencies have continued to evaluate whether existing regulations are
appropriate to address evolving risks. In recent years, certain banking
organizations that are not global systemically important banking
organizations (GSIBs) have grown in size and complexity, and new
vulnerabilities have emerged, such as increased reliance on uninsured
deposits. In light of these trends, the Board and the FDIC issued an
advance notice of proposed rulemaking (ANPR) in October 2022 seeking
public input on whether a long-term debt requirement was appropriate to
address the financial stability risk associated with the material
distress or failure of certain non-GSIB large banking organizations.\1\
More recently, the insured depository institutions (IDIs) of certain
non-GSIB banking organizations with consolidated assets of $100 billion
or more experienced significant withdrawals of uninsured deposits in
response to underlying weaknesses in their financial position,
precipitating their failures. These events have further highlighted the
risk that the failure of one of these banking organizations can spread
to other financial institutions and potentially give rise to systemic
risk. Moreover, these recent IDI failures have resulted in significant
costs to the FDIC's Deposit Insurance Fund (DIF).
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\1\ See Resolution-Related Resource Requirements for Large
Banking Organizations, 87 FR 64170 (Oct. 24, 2022), <a href="https://www.federalregister.gov/documents/2022/10/24/2022-23003/resolution-related-resource-requirements-for-large-banking-organizations">https://www.federalregister.gov/documents/2022/10/24/2022-23003/resolution-related-resource-requirements-for-large-banking-organizations</a>.
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To address these risks, the Board is proposing to require Category
II, III, and IV bank holding companies (BHCs) and
[[Page 64526]]
savings and loan holding companies (SLHCs and, together with BHCs,
``covered HCs''), and Category II, III, and IV U.S. intermediate
holding companies (IHCs) of foreign banking organizations (FBOs) that
are not GSIBs (``covered IHCs'' and, together with covered HCs,
``covered entities'') to issue and maintain minimum amounts of long-
term debt (LTD) that satisfies certain requirements. The agencies also
are proposing to require IDIs that are not consolidated subsidiaries of
U.S. GSIBs and that (i) have at least $100 billion in consolidated
assets or (ii) are affiliated with IDIs that have at least $100 billion
in consolidated assets (covered IDIs) to issue and maintain minimum
amounts of LTD.\2\ Under the proposal, covered IDIs that are
consolidated subsidiaries of covered entities would be required to
issue the LTD internally to a company that consolidates the covered
IDI, which would in turn be required to purchase that LTD. Covered IDIs
that are not consolidated subsidiaries of covered entities would be
permitted (and where there is no controlling parent, required) to issue
their LTD externally to nonaffiliates. Under the proposal, only debt
instruments that are most readily able to absorb losses in a resolution
proceeding would qualify as eligible LTD. Therefore, the agencies
believe the proposal would improve the resolvability of covered
entities and covered IDIs.
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\2\ IDIs that are consolidated subsidiaries of U.S. GSIBs would
not be subject to the proposed LTD requirement because their parent
holding companies are subject to the LTD requirement under the
Board's total loss-absorbing capacity (TLAC) rule. See 12 CFR 252
subparts G and P. In addition, U.S. GSIBs are subject to the most
stringent capital, liquidity, and other prudential standards in the
United States. These firms also have adopted resolution plans
reflecting guidance issued by the Board and the FDIC which
establishes a capital and liquidity framework for resolution. The
guidance (including the provisions related to Resolution Capital
Adequacy and Positioning, or RCAP) is designed to ensure adequate
maintenance of loss-absorbing resources either at the parent or at
material subsidiaries such that all material subsidiaries, including
IDIs, could be recapitalized in the event of resolution under the
single point of entry resolution strategies adopted by the U.S.
GSIBs. See Guidance for Sec. 165(d) Resolution Plan Submissions by
Domestic Covered Companies applicable to the Eight Largest, Complex
U.S. Banking Organizations, 84 FR 1438 (Feb. 4, 2019), <a href="https://www.federalregister.gov/documents/2019/02/04/2019-00800/final-guidance-for-the-2019">https://www.federalregister.gov/documents/2019/02/04/2019-00800/final-guidance-for-the-2019</a>.
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By augmenting loss-absorbing capacity, LTD can provide banking
organizations and banking regulators greater flexibility in responding
to the failure of covered entities and covered IDIs. In the resolution
of a failed IDI, the availability of an outstanding amount of LTD may
increase the likelihood of an orderly and cost-effective resolution for
the IDI and may help minimize costs to the DIF. Even where the amount
of outstanding LTD is insufficient to absorb enough losses so that all
depositor claims at the IDI can be fully satisfied, it would reduce
potential costs to the DIF and may expand the range of options
available to the FDIC as receiver. In addition, the proposed LTD
requirement could improve the resilience of covered entities and
covered IDIs by enhancing the stability of their funding profiles.
Investors in LTD could also exercise market discipline over issuers of
LTD.
1. Risks Presented by Covered Entities and Covered IDIs, and Challenges
in Resolution
Covered entities today primarily operate a bank-centric business
model, with deposits providing the main source of their funding.\3\
Following the 2008 financial crisis, the reliance of covered entities
on uninsured deposits grew dramatically.\4\ This increased reliance on
uninsured deposit funding has given rise to vulnerabilities at these
banking organizations.
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\3\ According to FR Y-9C and Call Report data as of December 31,
2022, for domestic Category II, III and IV BHCs and SLHCs with more
than $100 billion in total assets, excluding U.S. GSIBs and
grandfathered unitary SLHCs, deposits account for approximately 82
percent of total liabilities. Review of the Federal Reserve's
Supervision and Regulation of Silicon Valley Bank, Table 1 (Apr.
2023) (SVB Report), <a href="https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf">https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf</a>. Comparatively, across the U.S. GSIBs,
deposits account for approximately 54 percent of total liabilities.
\4\ Data from Call Reports show that the proportion of uninsured
deposits to total deposits at covered entities increased from about
31 percent to 43 percent from 2009 to 2022.
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As recent events have highlighted, high levels of uninsured deposit
funding can pose an especially significant risk of bank runs when
customers grow concerned over the solvency of their bank. The failure
of covered entities or covered IDIs can also spread to a broader range
of banking organizations, impacting the provision of financial services
and access to credit for individuals, families, and businesses. FDIC
research shows that account holders with uninsured deposits are more
sensitive to negative news regarding the stability of their banks and
are more likely to withdraw funds to protect themselves than those
holding only insured deposits.\5\ The sensitivity of uninsured
depositors to information flows has been amplified by social media,
potentially further shortening the timeline between a banking
organization experiencing a negative news event and being faced with a
potential deposit run. This can, in turn, bring about the rapid failure
of a covered entity, forcing its IDI subsidiary into an FDIC
receivership with little runway for recovery steps to be implemented or
for contingency planning for resolution. The speed at which stress
occurs has the potential to cause contagion to other institutions
perceived to be similarly situated.
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\5\ See FDIC, Deposit Inflows and Outflows in Failing Banks: The
Role of Deposit Insurance (last updated July 15, 2022), <a href="https://www.fdic.gov/analysis/cfr/working-papers/2018/cfr-wp2018-02-update.pdf">https://www.fdic.gov/analysis/cfr/working-papers/2018/cfr-wp2018-02-update.pdf</a>.
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Among covered entities that are subject to resolution planning
requirements under Title I of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act), most indicate that their
preferred resolution strategy involves the resolution of their IDI
subsidiaries under the Federal Deposit Insurance Act of 1950, as
amended (FDI Act), with the covered entities being resolved under
Chapter 11 of the U.S. Bankruptcy Code. In the resolution of an IDI
under the FDI Act, the FDIC as receiver has a variety of strategic
options, including, among others, selling the IDI's assets and
transferring its deposit liabilities to one or more healthy acquirers,
transferring the IDI's assets and deposit liabilities to a bridge
depository institution, or executing an insured deposit payout and
liquidation of the assets of the failed bank. Many covered entities
focus in their resolution plans on a bridge strategy where the FDIC
transfers the assets and deposit liabilities of a failed IDI to a newly
organized bridge depository institution that the FDIC continues to
operate. This resolution option can allow the FDIC to effectively
stabilize the operations of the failed IDI and preserve the failed
IDI's franchise value, making the business of the failed IDI or its
separate business lines more attractive to a greater number of
potential acquirers.
The FDIC is required by section 13(c) of the FDI Act to resolve an
IDI in a manner that poses the least cost to the DIF.\6\ Depending on
the losses incurred at an IDI and on the liability structure of the
IDI, the FDIC could be required to impose losses on the IDI's uninsured
depositors in order to satisfy the least-cost requirement, unless the
systemic risk exception is invoked.\7\ As recent
[[Page 64527]]
experiences have demonstrated, if uninsured depositors believe they
might lose a portion of their deposit funds or they might encounter
interrupted access to such funds, contagion can spread to other
institutions and cause deposit runs beyond those at the failing IDI.
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\6\ See 12 U.S.C. 1823(c)(4).
\7\ Invocation of the systemic risk exception allows the FDIC to
take actions that could be inconsistent with the least-cost
requirement in the FDI Act. The systemic risk exception
determination can only be made by the Secretary of the Treasury, in
consultation with the President, and with the recommendation of two-
thirds of the boards of the Board and the FDIC, upon a determination
that compliance with the least-cost requirement would have serious
adverse effects on economic conditions or financial stability. 12
U.S.C. 1823(c)(4)(G).
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The recent failures of three IDIs that would have been covered
within the scope of this proposal, Silicon Valley Bank (SVB), Signature
Bank (SBNY), and First Republic Bank (First Republic), highlighted the
risks posed by the failure of a covered IDI, including systemic
contagion, as well as the challenges that the FDIC can face in
executing an orderly resolution for covered IDIs. The comparative
absence of alternate forms of stable funding in these cases, other than
equity and deposits, increased these banks' vulnerability to deposit
runs, and these runs precipitated their failures. Despite prompt action
taken by regulators to facilitate the resolution of these failed IDIs,
there was contagion in the banking sector, particularly for certain
covered entities and certain regional banking organizations,\8\ some of
which experienced higher than normal deposit outflows during this
time.\9\ The proposed rule, if fully implemented at the time of the
failure of these firms, would have provided billions of dollars of
additional loss-absorbing capacity. The agencies believe that the
presence of a substantial layer of liabilities that absorbs losses
ahead of uninsured depositors could have reduced the likelihood of
those depositors running, might have facilitated resolution options
that were not otherwise available and could have made systemic risk
determinations unnecessary.
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\8\ Regional banking organizations generally are considered
those with total consolidated assets between $10 billion and $100
billion. See, e.g., SVB Report.
\9\ See GAO, Preliminary Review of Agency Actions Related to
March 2023 Bank Failures at 32 (Apr. 28, 2023), <a href="https://www.gao.gov/assets/gao-23-106736.pdf">https://www.gao.gov/assets/gao-23-106736.pdf</a>.
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2. Key Benefits and Rationale of the Proposal
The proposed LTD requirements would improve the resolvability of
covered entities and covered IDIs because LTD can be used to absorb
loss and create equity in resolution. In particular, because LTD is
subordinate to deposits and can be used by the FDIC to absorb losses by
leaving it behind in the receivership estate of a failed IDI, it can
help mitigate the risk that any depositors would take losses in the
resolution of the IDI. Because LTD absorbs losses before deposits, an
LTD requirement at the covered IDI would give the FDIC greater
flexibility, including the potential to transfer all deposit
liabilities (including uninsured deposit liabilities) of a failed IDI
to an acquirer or to a bridge depository institution in a manner
consistent with the FDI Act's least-cost requirement.
Expanding the FDIC's range of options for resolving a failed IDI to
potentially include the use of a bridge depository institution that can
assume all deposits on a least-cost basis can significantly improve the
prospect of an orderly resolution. When an IDI fails quickly, a bridge
depository institution might afford the FDIC additional time to find an
acquirer for the IDI's assets and deposits. Transfer of deposits and
assets to a bridge depository institution may also give the FDIC
additional time to execute a variety of resolution strategies, such as
selling the IDI in pieces over time or effectuating a spin-off of all
or parts of the IDI's operations or business lines. LTD can therefore
reduce costs to the DIF and expand the available resolution options if
a bank fails. The availability of LTD would also improve the FDIC's
options for resolving a failed IDI by maintaining franchise value,
improving the marketability of the failed IDI, and reducing the need to
use DIF resources to stabilize the institution or support a purchaser.
Further, the availability of LTD could enable strategies involving
bridge depository institutions to meet the least-cost test. The
availability of LTD resources would also potentially support resolution
strategies that involve a recapitalized bridge depository institution
exiting from resolution on an independent basis as a newly-chartered
IDI that would have new ownership. This may be particularly important
in circumstances where there are market or other limitations that
preclude finding a suitable acquirer, and where other options, such as
liquidation, are not feasible or involve unacceptable levels of
systemic risk. Further, there may be a limited market for the covered
IDIs subject to this proposal due to their size and, in some cases,
relatively more specialized business models. As a result, at the time
of resolution, strategies that involve the sale of large IDIs may be
limited due to market or other barriers, or may involve high costs in
order to make a sale attractive and feasible for an acquirer,
especially taking into account post-acquisition capital requirements.
The availability of LTD to absorb losses or to recapitalize a failed
IDI through the resolution process could also mitigate the impact of a
covered IDI's failure on financial stability by reducing the risk to
uninsured depositors, thereby reducing the risk of runs and contagion.
LTD can therefore reduce costs to the DIF and expand the available
resolution options if a bank fails.
Although the primary benefits of LTD relate to the resolution of
covered entities and their covered IDI subsidiaries, LTD can also
improve the resiliency of these banking organizations prior to failure.
Considering its long maturity, LTD would be a stable source of funding
and, in contrast to other forms of funding like uninsured deposits, may
serve as a source of market discipline through pricing.
B. Overview of the Proposal
The agencies are inviting comment on this notice of proposed
rulemaking to improve the resolvability of covered entities and covered
IDIs. The proposal includes five key components.
First, the proposal would require Category II, III, and IV covered
entities to issue and maintain outstanding minimum levels of eligible
LTD. This aspect of the proposal is being issued solely by the
Board.\10\
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\10\ The proposal would also require covered entities to
purchase the debt of their subsidiaries that are internally issuing
IDIs under the proposal.
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Second, the proposal would require covered IDIs to issue and
maintain outstanding a minimum amount of eligible LTD.\11\ This aspect
of the proposal is being issued by all of the agencies. A covered IDI
that is a consolidated subsidiary of a covered entity or a foreign GSIB
IHC would be required to issue eligible LTD internally to an entity
that directly or indirectly consolidates the covered IDI.\12\ A covered
IDI that is not a controlled subsidiary of a further parent entity
would be required to issue eligible LTD to investors that are not
affiliates. A covered IDI that is a consolidated subsidiary of a
further parent entity that
[[Page 64528]]
is not a covered entity or that is a controlled but not consolidated
subsidiary of a covered entity or a foreign GSIB IHC would be permitted
to issue eligible LTD to a company that controls the covered IDI or to
investors that are not affiliates.
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\11\ The IDI requirement would apply to an IDI of a U.S. IHC
regardless of whether the U.S. IHC is subject to the Board's TLAC
rule, provided the IDI meets the other requirements for
applicability. See Total Loss-Absorbing Capacity, Long-Term Debt,
and Clean Holding Company Requirements for Systemically Important
U.S. Bank Holding Companies and Intermediate Holding Companies of
Systemically Important Foreign Banking Organizations, 82 FR 8266
(Jan. 24, 2017), <a href="https://www.federalregister.gov/documents/2017/01/24/2017-00431/total-loss-absorbing-capacity-long-term-debt-and-clean-holding-company-requirements-for-systemically">https://www.federalregister.gov/documents/2017/01/24/2017-00431/total-loss-absorbing-capacity-long-term-debt-and-clean-holding-company-requirements-for-systemically</a>.
\12\ A subsidiary is considered a consolidated subsidiary based
on U.S. generally accepted accounting principles (GAAP);
consolidation generally applies when its holding company controls a
majority (greater than 50 percent) of the outstanding voting
interests.
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Third, the operations of covered entities would be subject to
``clean holding company'' requirements to further improve the
resolvability of covered entities and their operating subsidiaries.
This aspect of the proposal is being issued solely by the Board. In
particular, the proposal would prohibit covered entities from issuing
short-term debt instruments to third parties, entering into qualified
financial contracts (QFCs) with third parties, having liabilities that
are subject to ``upstream guarantees'' \13\ or that are subject to
contractual offset against amounts owed to subsidiaries of the covered
entity. The proposal would also cap the amount of a covered entity's
liabilities that are not LTD and that rank at either the same priority
as or junior to its eligible external LTD at 5 percent of the sum of
the covered entity's common equity tier 1 capital, additional tier 1
capital, and eligible LTD amount.
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\13\ Upstream guarantees are when a parent company's obligations
are guaranteed by one of its subsidiaries.
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Fourth, to limit the potential for financial sector contagion due
to interconnectivity in the event of the failure of a covered entity or
covered IDI, the proposed rule would expand the existing capital
deduction framework for LTD issued by U.S. GSIBs and the IHCs of
foreign GSIBs to include external LTD issued by covered entities and
external LTD issued by covered IDIs. This aspect of the proposal is
being issued by all of the agencies.
Finally, the proposal would make certain technical changes to the
existing TLAC rule that applies to the U.S. GSIBs and U.S. IHCs of
foreign GSIBs. This aspect of the proposal is being issued solely by
the Board. These changes would harmonize provisions within the TLAC
rule and address items that have been identified through the Board's
administration of the rule.
The revisions introduced by the proposal would interact with the
agencies' capital rule and proposed amendments to those rules.\14\
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\14\ On July 27, 2023, the agencies issued a notice of proposed
rulemaking inviting comment on a proposal to amend the capital rule.
See Joint press release: Agencies request comment on proposed rules
to strengthen capital requirements for large banks (July 27, 2023),
<a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230727a.htm">https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230727a.htm</a>.
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Question 1: The agencies invite comment on the implications of the
interaction of the proposal with other existing rules and with other
notices of proposed rulemaking. How do proposed changes to the
agencies' capital rule affect the advantages and disadvantages of this
proposed rule?
II. Advance Notice of Proposed Rulemaking
In October 2022, the Board and the FDIC published an ANPR to
solicit public input regarding whether an extra layer of loss-absorbing
capacity could improve optionality in resolving certain large banking
organizations and their subsidiary IDIs, and the costs and benefits of
such a requirement.\15\ The Board and the FDIC received nearly 80
comments on the ANPR from banking organizations, trade associations,
public interest advocacy groups, members of Congress, and private
individuals. Two members of the Senate Banking Committee as well as an
advocacy group representing independent banks supported the proposal.
Most commenters opposed or raised concerns regarding the proposal.
However, most of the comments were received prior to the recent bank
stress events involving SVB, SBNY, and First Republic and therefore did
not take those events into consideration.
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\15\ Resolution-Related Resource Requirements for Large Banking
Organizations, 87 FR 64170 (Oct. 24, 2022), <a href="https://www.federalregister.gov/documents/2022/10/24/2022-23003/resolution-related-resource-requirements-for-large-banking-organizations">https://www.federalregister.gov/documents/2022/10/24/2022-23003/resolution-related-resource-requirements-for-large-banking-organizations</a>.
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Many commenters asserted that an LTD requirement for covered
entities and covered IDIs is unnecessary and that most covered entities
and covered IDIs are prepared for orderly resolution pursuant to their
existing resolution plans submitted to the FDIC and the Board.
Specifically, commenters argued that covered entities are better
capitalized and have stronger liquidity positions under post-crisis
regulations, and that covered entities are non-complex and present
minimal systemic risk. The commenters also maintained that recent
balance sheet growth at covered entities is not concerning because such
growth has involved increases in mostly low-risk, liquid assets.
Further, commenters asserted that the resolution plans that have been
submitted to the agencies by the covered entities and covered IDIs
subject to such requirements are effective and already provide for
optionality in resolution. The commenters argued that the imposition of
a uniform LTD requirement would be inappropriate for the multiple point
of entry (MPOE) resolution strategies followed by certain covered
entities and could require covered entities to unnecessarily change
their established resolution plans. Commenters also argued that
anticipated stronger capital requirements that would be imposed
pursuant to the anticipated Basel III finalization reforms would
further diminish the need for an LTD requirement.
Multiple commenters, while supporting the spirit of the policy
options raised in the ANPR, suggested the agencies should raise equity
capital requirements rather than impose an LTD requirement to improve
the resiliency of covered entities. Alternatively, some commenters
argued that covered entities should be able to count any equity capital
in excess of regulatory minimums toward any LTD requirement.
Several commenters argued that the benefits of an LTD requirement
for covered entities would not outweigh its immediate costs. These
commenters asserted that an excessive LTD requirement could decrease
the availability of credit to businesses and consumers. Further, a few
commenters suggested that an LTD requirement could imply uninsured
depositor protection for IDIs subject to such a requirement, thereby
increasing moral hazard. Several commenters stressed that any LTD
requirement should be supported by a rigorous cost-benefit analysis.
Finally, several commenters questioned whether the Board possesses
the statutory authority to impose an LTD requirement on BHCs under
section 165(b) of the Dodd-Frank Act, as amended.\16\ These commenters
argued that the Board's authority under section 165 to issue enhanced
prudential standards is limited to addressing financial stability
risks. Commenters stated that covered entities do not pose a threat to
financial stability and it is uncertain whether section 165(b) supports
imposing an LTD requirement on covered entities.
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\16\ Public Law 111-203; 124 Stat. 1376 (2010), codified at 12
U.S.C. 5365(b).
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The agencies considered these comments in developing the proposed
rule. In light of recent experiences with SVB, SBNY, and First
Republic, the agencies are extending the scope of the proposed rule to
large banking organization with total consolidated assets of $100
billion or more to reduce the likelihood of contagion from these
banking organizations and to reduce the cost to the DIF should they
fail. The agencies further note that both equity capital and LTD can be
used to absorb losses and reduce the potential impact
[[Page 64529]]
from the failure of a large banking organization; unlike equity
capital, however, LTD can always be used as a fresh source of capital
subsequent to failure and can afford the FDIC more options in resolving
a failed bank.
III. LTD Requirement for Covered Entities
A. Scope of Application
The proposed rule would apply to Category II, III, and IV U.S. BHCs
and SLHCs, and Category II, III, and IV U.S. IHCs of FBOs that are not
currently subject to the existing TLAC rule as defined under the
Board's Regulations LL and YY (covered entities).\17\ Under Regulations
LL and YY, a Category II covered entity is one that has (i) at least
$700 billion or more in average total consolidated assets, or (ii) at
least $100 billion in average total consolidated assets and $75 billion
or more in average cross-jurisdictional activity.\18\ A Category III
covered entity is one that has (i) at least $250 billion in average
total consolidated assets, or (ii) (A) $100 billion in average total
consolidated assets and (B) $75 billion or more in average total
nonbank assets, average weighted short-term wholesale funding, or
average off-balance sheet exposure.\19\ A Category IV covered entity is
one that has at least $100 billion in average total consolidated
assets.\20\
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\17\ 12 CFR 252.2 (BHCs and U.S. IHCs under Regulation YY); 12
CFR 238.2(cc)-(ee) (SLHCs under Regulation LL).
\18\ 12 CFR 252.5(c) (BHCs and IHCs); 12 CFR 238.10(b) (SLHCs).
\19\ 12 CFR 252.5(d) (BHCs and IHCs); 12 CFR 238.10(c) (SLHCs).
\20\ 12 CFR 252.5(e) (BHCs and IHCs); 12 CFR 238.10(d) (SLHCs).
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Given the size of covered entities, the agencies continue to
believe that the failure of one or more covered entities or covered
IDIs could potentially have a negative impact on U.S. financial markets
and the broader U.S. economy. While several commenters to the ANPR
downplayed this concern, this risk was demonstrated by the recent
failures of SBNY, SVB, and First Republic,\21\ which contributed to
depositor outflows at other banking organizations. In addition, some
covered entities have operations that have been identified as critical
operations by the Board and FDIC, the disorderly wind down of which
could pose additional risks to U.S. financial stability. These
financial stability implications may increase the likelihood regulators
quickly resolve a covered entity by selling its assets to a larger
acquirer, an approach that may itself add to long-term financial
stability concerns from increased concentration in the banking sector.
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\21\ SBNY had total consolidated assets of around $110 billion,
SVB had total consolidated assets of just over $200 billion, and
First Republic had total consolidated assets of just over $230
billion at the time of failure. The agencies note that neither SBNY
nor First Republic had a holding company, so in those cases it was
solely an IDI that failed. However, their failures illustrate the
potential risk of contagion in the event of the material distress or
failure of a large IDI.
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Question 2: Does the proposed scope of application appropriately
address the risks discussed above? What additional factors, if any,
should the Board consider in determining which entities should be
subject to the proposed rule, other than those that are used to
determine whether a covered entity is placed within Categories II-IV?
For example, what additional or alternate factors should the Board
consider in setting requirements for IHCs (e.g., should the proposed
rule only apply to IHCs with IDIs that would be subject to the proposed
rule's IDI requirements)? Are there elements of the rule that should be
applied differently to Category IV organizations as compared to
Category II and III organizations, and what would be the advantages and
disadvantages of such differences in requirements?
Question 3: What additional characteristics of banking
organizations should the Board consider in setting the scope of the
proposed rule and why? Should consideration be given to additional
characteristics such as reliance on uninsured deposits; proportion of
assets, income, and employees outside of the IDI; or to other aspects
of a covered entity's balance sheet? How should these characteristics
affect the proposed scope? Please explain.
B. Covered Savings and Loan Holding Companies
As noted above, the proposed rule would apply to Category II, III,
and IV SLHCs, as defined in 12 CFR 238.10. Section 10(g) of the Home
Owners' Loan Act (HOLA) \22\ authorizes the Board to issue such
regulations and orders regarding SLHCs, including regulations relating
to capital requirements, as the Board deems necessary or appropriate to
administer and carry out the purposes of section 10 of HOLA. As the
primary Federal regulator and supervisor of SLHCs, one of the Board's
objectives is to ensure that SLHCs operate in a safe-and-sound manner
and in compliance with applicable law. Like BHCs, SLHCs must serve as a
source of strength to their subsidiary savings associations and may not
conduct operations in an unsafe and unsound manner.
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\22\ 12 U.S.C. 1467a(g).
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Section 165 of the Dodd-Frank Act directs the Board to establish
specific enhanced prudential standards for large BHCs and companies
designated by the Financial Stability Oversight Council to prevent or
mitigate risks to the financial stability of the United States.\23\
Section 165 does not prohibit the application of standards to SLHCs and
BHCs pursuant to other statutory authorities.\24\
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\23\ 12 U.S.C. 5365(a)(1).
\24\ Section 401(b) of the Economic Growth, Regulatory Relief,
and Consumer Protection Act, Public Law 115-174, 132 Stat. 1356
(2018).
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SLHCs that are covered HCs engage in many of the same activities
and face similar risks as BHCs that are covered HCs. SLHCs that are
covered HCs are substantially engaged in banking and financial
activities, including deposit taking and lending.\25\ Some SLHCs that
are covered HCs engage in credit card and margin lending and certain
complex nonbanking activities that pose higher levels of risk. SLHCs
that are covered HCs may also rely on high levels of short-term
wholesale funding, which may require sophisticated capital, liquidity,
and risk management processes. Similar to BHCs that are covered HCs,
SLHCs that are covered HCs conduct business across a large geographic
footprint, which in times of stress could present certain operational
risks and complexities. Subjecting SLHCs that are covered HCs to the
proposed rule would improve their resolvability and promote their safe
and sound operations.
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\25\ The proposed rule would not apply to an SLHC with 25
percent or more of its total consolidated assets in insurance
underwriting subsidiaries (other than assets associated with
insurance underwriting for credit), an SLHC with a top-tier holding
company that is an insurance underwriting company, or a
grandfathered unitary SLHC that derives a majority of its assets or
revenues from activities that are not financial in nature under
section 4(k) of the Bank Holding Company Act (12 U.S.C. 1843(k)).
See 12 CFR 238.2(ff).
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Question 4: What are the advantages and disadvantages to applying
the proposed rule to SLHCs that are covered HCs in addition to BHCs
that are covered HCs? How are the risks that an SLHC poses in
resolution different from the risks that a BHC poses in resolution? How
might those differences warrant a different LTD requirement for SLHCs
relative to BHCs?
C. Calibration of Covered Entity LTD Requirement
Under the proposal, a covered entity would be required to maintain
outstanding eligible LTD in an amount that is the greater of 6.0
percent of the covered entity's total risk-weighted
[[Page 64530]]
assets,\26\ 3.5 percent of its average total consolidated assets,\27\
and 2.5 percent of its total leverage exposure if the covered entity is
subject to the supplementary leverage ratio rule.\28\ A covered entity
would be prohibited from redeeming or repurchasing eligible LTD prior
to its stated maturity date without obtaining prior approval from the
Board where the redemption or repurchase would cause the covered
entity's eligible LTD to fall below its LTD requirement.
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\26\ Total risk weighted assets would be defined as the greater
of a bank's standardized total risk-weighted assets and advanced
approaches total risk-weighted assets, if applicable.
\27\ For purposes of the LTD minimum requirement, average total
consolidated assets is defined as the denominator of the Board's
tier 1 leverage ratio requirement. See 12 CFR 217.10(b)(4).
\28\ See 12 CFR 217.10(c)(2).
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The proposed eligible LTD requirement was calibrated primarily on
the basis of a ``capital refill'' framework. Under that framework, the
objective of the LTD requirement is to ensure that each covered entity
has a minimum amount of eligible LTD such that, if the covered entity's
going-concern capital is fully depleted and the covered entity fails
and enters resolution, the eligible LTD would be sufficient to fully
recapitalize the covered entity by replenishing its going-concern
capital to at least the amount required to meet minimum leverage
capital requirements and common equity tier 1 risk-based capital
requirements plus the capital conservation buffer applicable to covered
entities.
In terms of risk-weighted assets, a covered entity's common equity
tier 1 capital level is subject to a minimum requirement of 4.5 percent
of risk-weighted assets plus a capital conservation buffer equal to at
least 2.5 percent.\29\ Accordingly, a covered entity would be subject
to an external LTD requirement equal to 7 percent of risk-weighted
assets minus a 1 percentage point allowance for balance sheet
depletion. This results in a proposed LTD requirement equal to 6
percent of risk-weighted assets. The 1 percentage point allowance for
balance sheet depletion is appropriate under the capital refill theory
because the losses that the covered entity incurs leading to its
failure would deplete its risk-weighted assets as well as its capital.
Accordingly, the pre-failure losses would result in a smaller balance
sheet for the covered entity at the point of failure, meaning that a
smaller dollar amount of capital would be required to restore the
covered entity's pre-stress common equity tier 1 capital level.
Although the specific amount of eligible external LTD necessary to
restore a covered entity to its minimum required common equity tier 1
capital level plus minimum buffer in light of the diminished size of
its post-failure balance sheet will vary, applying a uniform 1
percentage point allowance for balance sheet depletion avoids undue
regulatory complexity.
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\29\ See 12 CFR 217.11. A covered entity may be subject to a
buffer greater than 2.5 percent under the capital rule due to the
stress capital buffer or countercyclical capital buffer.
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The application of the capital refill framework to the leverage-
based capital component of the LTD requirement is analogous. A covered
entity's tier 1 leverage ratio minimum is 4 percent of average total
consolidated assets and its supplementary leverage ratio minimum is 3
percent of total leverage exposure, if the covered entity is subject to
the supplementary leverage ratio.\30\ Under the proposal, a covered
entity would be subject to an LTD requirement equal to 3.5 percent of
average total consolidated assets and 2.5 percent of total leverage
exposure, if applicable. These requirements, with a balance sheet
depletion allowance of 0.5 percentage points, are appropriate to ensure
that a covered entity has a sufficient amount of eligible LTD to refill
its leverage ratio minimums in the event it depletes all or
substantially all of its tier 1 capital prior to failing.
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\30\ Covered entities are not subject to a buffer requirement
corresponding to their leverage ratio or SLR requirement.
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The proposed eligible LTD requirement would support an MPOE \31\
resolution through the process by which a covered IDI that is a
consolidated subsidiary of a covered entity issues eligible LTD
internally. The internally-issued LTD would be available to absorb
losses that may otherwise be borne by uninsured depositors and certain
other creditors of the subsidiary IDI in the event of its failure,
thereby supporting market confidence in the safety of deposits even in
the event of resolution, thus limiting the potential for bank runs. The
proposed calibration would increase optionality for the FDIC as the LTD
amount would be sufficient to capitalize a bridge depository
institution and increase its marketability, leading to greater resale
value. To the extent that a covered entity has several operating
subsidiaries, their recapitalization would support their orderly wind
down. In a single point of entry (SPOE) \32\ resolution, the required
LTD amount, in conjunction with a covered entity's existing equity
capital, should be able to absorb losses and support recapitalization
of the failed covered entity's material subsidiaries.
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\31\ Under an MPOE strategy, multiple entities within a
consolidated organization would enter separate resolution
proceedings. For example, many covered entities plan that the parent
holding company would file a petition under chapter 11 of the U.S.
Bankruptcy Code, and that the FDIC would resolve the IDI subsidiary
under the FDI Act.
\32\ In an SPOE resolution, only the covered HC itself would
enter resolution. In the case of a covered IHC, an SPOE resolution
strategy for the U.S. operations of the covered IHC, where the
parent FBO pursues a global MPOE strategy, involves only the covered
IHC entering into resolution while its subsidiaries would continue
to operate. The eligible external LTD issued by the covered IHC
would be used to absorb losses incurred by the IHC and its operating
subsidiaries, enabling the recapitalization of the operating
subsidiaries that had incurred losses and allowing those
subsidiaries--including any IDIs--to continue operating on a going-
concern basis. SPOE is also an option for the resolution of a
covered entity under the Orderly Liquidation Authority provisions of
Title II of the Dodd-Frank Act.
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The calibration of the eligible LTD requirement is based on the
capital refill framework, which depends on the precise structure and
calibration of bank capital requirements. The Board will continue to
evaluate the LTD requirement in light of any changes to capital
requirements over time. In addition, the proposed rule would reserve
the authority for the Board to require a covered entity to maintain
more, or allow a covered entity to maintain less, eligible LTD than the
minimum amount required by the proposed rule under certain
circumstances. This reservation of authority would ensure that the
Board could require a covered entity to maintain additional LTD if the
covered entity poses elevated risks that the proposed rule seeks to
address.
The proposed rule would also prohibit a covered entity from
redeeming or repurchasing any outstanding eligible LTD without the
prior approval of the Board if after the redemption or repurchase the
covered entity would not meet its minimum LTD requirement. The proposed
rule would allow a covered entity to redeem or repurchase its eligible
LTD without prior approval where such redemption or repurchase would
not result in the covered entity failing to comply with the minimum
eligible LTD requirement. This would give the covered entity
flexibility to manage its outstanding debt levels without interfering
with the underlying purpose of the proposed rule. In addition, the
proposed rule also includes a provision that would allow the Board,
after providing a covered entity with notice and an opportunity to
respond, to order the covered entity to exclude from its outstanding
eligible LTD amount any otherwise eligible debt securities with
features that would significantly impair the ability of such
[[Page 64531]]
debt securities to absorb loss in resolution.\33\
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\33\ Section 263.83 of the Board's rules of procedure describes
the notice and response procedures that apply if the Board
determines that a company's capital levels are not adequate. See 12
CFR 263.83. The Board would follow the same procedures under the
proposed rule to determine that a covered entity must exclude from
its eligible LTD amount securities with features that would
significantly impair the ability of such debt securities to absorb
loss in resolution. For example, the Board would provide notice to a
covered entity of its intention to require the covered entity to
exclude certain securities from its eligible LTD amount and up to 14
days to respond before the Board would issue a final notice
requiring that the covered entity to exclude the securities from its
eligible LTD amount, unless the Board determines that a shorter
period is necessary.
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In addition, the Board could take an enforcement action against a
covered entity for falling below its minimum LTD requirement. This
would be consistent with the Board's authority to pursue enforcement
actions for violations of law, rules, or regulations.
Question 5: What alternative calibration, if any, should the Board
consider for the eligible LTD requirement to be applied to covered
entities? Is the capital refill framework the appropriate methodology
for covered entities? Should the requirements be higher or lower? What
other factors should the Board consider in determining the appropriate
calibration? How should differences in a covered entity's resolution
strategy influence the calibration of the required LTD amount, if at
all? Please discuss the advantages and disadvantages of alternative
calibrations the Board should consider.
Question 6: Should the Board consider increasing or decreasing the
calibration of the eligible external LTD requirement applicable to
covered entities based on any other factors, such as the level of
uninsured deposits at their IDI subsidiaries? If so, how should the
Board differentiate between different types of uninsured deposits
(e.g., what features of one type of uninsured deposits make such
deposits more stable than other types of uninsured deposits), if at
all, and at what level of uninsured deposits should the Board increase
or decrease calibration for the LTD requirement? What other
differentiated consideration or treatment should be afforded uninsured
deposits with these characteristics?
Question 7: The proposal would require covered IDIs to issue LTD,
as discussed more fully below. There may be circumstances in which IDIs
within a single consolidated group might be required to issue, in the
aggregate, a greater amount of internal LTD to a covered entity than
the covered entity's external LTD requirement. What would be the
advantages or disadvantages of requiring the covered entity to issue an
amount of LTD that is as large as the aggregate amount that its covered
IDI subsidiaries are required to issue? What alternative approaches
should the Board consider to address this circumstance? How might the
absence of such a requirement impede the proposed LTD requirement in
achieving its intended purposes, if at all?
Question 8: The Board is considering whether and how to specify a
period for covered entities to raise additional LTD after the entity
has been involved in a situation where the FDIC has been appointed
receiver. What are the advantages or disadvantages of permitting a
period to raise additional LTD following such an event? How long should
such a period reasonably be? Should the agencies specify a similar
period for U.S. GSIBs and the U.S. IHCs of foreign GSIBs that are
already subject to LTD and TLAC requirements?
IV. LTD Requirement for Covered IDIs
The proposed rule also would additionally create a new requirement
for covered IDIs to issue eligible LTD. Requiring covered IDIs to
maintain minimum amounts of eligible LTD, which would be available to
absorb losses in the event of the failure of the IDI, would improve the
FDIC's resolution options for the covered IDI. The objective of the
IDI-level LTD requirement is to ensure that, if a covered IDI's equity
capital is significantly or completely depleted and the covered IDI
fails, the eligible IDI LTD would be available to absorb losses, which
would help to protect depositors and certain other creditors and afford
the FDIC additional optionality in resolving the IDI, including by
supporting the transfer of all deposits to one or more acquirers. Where
the failed bank is transferred to a bridge depository institution, the
eligible LTD would help stabilize the operations of the bridge, thereby
providing additional options for the FDIC to ultimately exit the
bridge.
Several commenters to the ANPR suggested that increasing bank
regulatory capital levels would be a more effective way to improve
resiliency of covered entities and covered IDIs because additional
capital would reduce their probability of default in the first place.
While higher regulatory capital levels would reduce the probability of
default of a covered IDI and may increase the chance that a covered
entity or covered IDI would have remaining equity in the event of its
failure, regulatory capital is likely to be significantly or completely
depleted in the lead up to an FDI Act resolution. While eligible LTD
would not help a troubled IDI remain adequately capitalized on a going-
concern basis, it would significantly reduce the likelihood of
contagion and loss to the DIF in resolving the failed bank. For
example, if in the lead up to resolution an IDI were to fall below its
minimum tier 1 capital requirements, any eligible LTD outstanding at
the IDI level would have significant gone-concern benefits in that it
would help to recapitalize the IDI. Because eligible LTD of a covered
IDI would be available to absorb losses and protect depositors in the
event of the failure of the IDI, it would increase optionality for the
FDIC in resolving the IDI while meeting the least-cost requirement of
the FDI Act. By supporting the FDIC's transfer of assets and deposits
to a bridge depository institution in accordance with the least-cost
requirement, eligible LTD may help preserve the franchise value of a
failed bank and enable the FDIC to pursue restructuring options such as
the sale of subsidiaries, branch networks, or business lines, as well
as other potential options for divestiture and exit.
A covered IDI that is a consolidated subsidiary of a covered entity
would be required to issue its eligible LTD to a company in the United
States that consolidates the IDI for accounting purposes. In practice,
the proceeds raised by the issuance of eligible LTD by a covered entity
would generally be ``downstreamed'' to its covered IDI subsidiary in
return for eligible internal LTD that would satisfy such covered IDI's
own eligible LTD requirement. A covered IDI that is not a controlled
subsidiary of a parent entity would be required to issue its eligible
LTD to a party that is not an affiliate of the covered IDI. A covered
IDI that is a consolidated subsidiary of a further parent entity that
is not a covered entity would be permitted to issue its eligible LTD to
a parent that controls the covered IDI or to investors that are not
affiliates.
A. Scope of Application
The proposed rule would require four categories of IDIs to issue
eligible LTD. First, the proposed rule would apply to any IDI that has
at least $100 billion in total consolidated assets and is not
controlled by a parent entity (mandatory externally issuing IDI).
Second, the proposed rule would apply to any IDI that has at least $100
billion in total consolidated assets and (i) is a consolidated
subsidiary of a company that is not a covered entity, a U.S. GSIB or a
foreign GSIB subject to the TLAC
[[Page 64532]]
rule or (ii) is controlled but not consolidated by another company
(permitted externally issuing IDI). Third, the proposed rule would
apply to an IDI that has at least $100 billion in total consolidated
assets and that is a consolidated subsidiary of a covered entity or a
foreign GSIB IHC (internally issuing IDI).\34\ Lastly, the proposed
rule would apply to any IDI that is affiliated with an IDI in one of
the first three categories (together with mandatory and permitted
externally issuing IDIs and internally issuing IDIs, covered IDIs).
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\34\ IDIs with $100 billion or more in total assets that are
subsidiaries of Category II, III, and IV U.S. IHCs would be subject
to the IDI-level requirement regardless of whether they ultimately
are controlled by a global systemically important FBO.
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The agencies propose to apply the IDI LTD requirement based on an
IDI's size. While size is not the only indicator of complexity, it is a
readily observable indicator, and, in general, IDIs with assets above
$100 billion tend to be more complex in terms of their businesses and
operations, are more difficult to resolve, and have a smaller pool of
prospective acquirers. As IDIs cross the $100 billion threshold in
total consolidated assets, their resolution can become increasingly
costly to the DIF.
Covered IDIs under the proposed rule would include IDIs affiliated
with IDIs that have at least $100 billion in total consolidated assets
because the FDIC may seek to resolve an IDI with at least $100 billion
in assets and its affiliated IDIs using either the same bridge
depository institution or multiple bridge depository institutions. When
an IDI in a group fails, it is likely that all IDIs in the group fail
due to interconnectedness and the statutory cross-guaranty imposed on
affiliated IDIs in the event of the failure of an IDI in the group.\35\
In addition, affiliated IDIs may engage in complementary business
activities, so placing them into a single bridge depository institution
or coordinating marketing and resolution in multiple bridge depository
institutions may improve marketability and attract a larger universe of
potential acquirers. Therefore, the proposed rule would include
affiliated IDIs in the definition of a covered IDI to help ensure that
in the event the affiliated IDIs enter resolution together, a
sufficient level of gone concern loss-absorbing resources will be
present to enable the FDIC to use one or more bridge depository
institutions to effectively resolve all of the affected covered IDIs.
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\35\ See 12 U.S.C. 1815(e).
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The proposed rule would apply to mandatory and permitted externally
issuing IDIs for the reasons discussed above concerning the risks
associated with IDIs that have at least $100 billion in total assets.
The risks associated with the failure of a mandatory externally issuing
IDI are not diminished because of the lack of a parent company and the
risks associated with the failure of a permitted externally issuing IDI
are not diminished because its parent is not subject to an LTD
requirement. Mandatory and permitted externally issuing IDIs may not
have the benefit of receiving the support of a holding company or being
part of a regulated consolidated organization with diversified
businesses. Applying the proposed rule to mandatory and permitted
externally issuing IDIs in addition to those with a covered entity
parent ensures competitive equality across all covered IDIs.
Question 9: What risks or resolution challenges are presented by
IDIs with less than $100 billion in total consolidated assets? In what
way do those risks or resolution challenges differ from those presented
by IDIs with at least $100 billion in total consolidated assets?
Question 10: How should the agencies address any evasion concerns
(e.g., holding companies managing their IDIs to stay below the $100
billion threshold to avoid the IDI LTD requirement)? What would be the
advantages and disadvantages of setting the applicability threshold to
be based on whether the total assets of the IDIs within a consolidated
organization are, in the aggregate, at least $100 billion or more?
Question 11: What would be the advantages and disadvantages of
allowing certain IDIs currently defined as internally issuing IDIs
(e.g., covered IDIs that are consolidated subsidiaries of Category IV
holding companies) to issue debt externally, even if they are a
consolidated subsidiary of a covered entity? If the agencies were to
allow some IDIs that are consolidated subsidiaries of a covered entity
to issue debt externally, how should the agencies determine which IDIs
may issue externally, and which would still be required to issue
internally? Should such a requirement replace the requirement that the
parent covered entity also issue debt externally?
Question 12: Are there special characteristics of mandatory
externally issuing IDIs that affect whether a mandatory externally
issuing IDI should be subject to a higher or lower LTD requirement than
proposed? For example, should mandatory externally issuing IDIs be
required to maintain an amount of LTD such that, if the IDI's equity
capital is fully depleted and the LTD is used to capitalize a bridge
depository institution, the bridge would be well-capitalized under the
agencies' prompt corrective action rules?
Question 13: What would be the advantages and disadvantages to
requiring permitted externally issuing IDIs to meet their minimum LTD
requirement by issuing only eligible internal debt securities or
eligible external debt securities rather than any combination of both?
What would be the advantages and disadvantages to requiring such a
permitted externally issuing IDI to meet its minimum LTD requirement by
issuing eligible external LTD only, rather than allowing issuance to a
parent holding company or other affiliates?
Question 14: Should the proposed rule require the holding company
of a permitted externally issuing IDI that issues eligible LTD to its
holding company to comply with the clean holding company requirements
discussed in section VI?
Question 15: Should the agencies take into consideration the
resolution plan of a covered entity submitted pursuant to Title I of
the Dodd-Frank Act in determining which IDIs to scope into the proposed
rule? For example, should the proposed IDI-level LTD requirement only
apply to IDI subsidiaries of covered entities that have adopted an MPOE
resolution strategy (i.e., (i) IDIs that are expected by the parent
resolution plan filer to enter into receivership if its parent fails
and (ii) where the Board and FDIC find that expectation to be
reasonable)? What would be the advantages and disadvantages and
potential incentive effects of applying an IDI-level LTD requirement to
IDIs that are subsidiaries of covered entities that have adopted an
SPOE resolution strategy? Certain covered IDIs are not subsidiaries of
entities subject to a resolution planning requirement. Are there
alternative approaches that might provide beneficial additional
flexibility for these covered IDIs?
Question 16: What other methods could the agencies use to achieve
the same benefits provided by the proposed rule concerning certainty of
the ultimate availability of LTD resources at an IDI that ultimately
enters resolution? Are there alternative approaches that might provide
beneficial additional flexibility for covered entities in an SPOE
resolution? What factors, such as the size and significance of non-bank
activities, should the agencies consider in determining whether any
such alternative approaches or additional requirements are appropriate?
Question 17: What would be the advantages and disadvantages of
requiring IDI subsidiaries of U.S. GSIBs
[[Page 64533]]
to issue specified minimum amounts internal LTD? Should the agencies
propose applying the same IDI-level requirements to these entities?
Question 18: For U.S. intermediate holding companies that are
subject to the Board's TLAC rule, to what extent does the existing LTD
requirement applicable at the IHC level already address the
considerations underlying the proposed imposition of a further LTD
requirement on any covered IDI subsidiary of such an IHC? For example,
what would be the advantages or disadvantages of changing the proposal
so that it would not require covered IDIs that are consolidated
subsidiaries of IHCs owned by foreign GSIBs to issue internal LTD to
the IHC?
Question 19: What are the advantages and disadvantages of requiring
IDIs affiliated with IDIs that have at least $100 billion in
consolidated assets to issue LTD pursuant to the proposed rule? What
standard should be used for determining whether an IDI is an affiliate
of a covered IDI? For example, should the IDI be treated as an
affiliate of a covered IDI only if it is consolidated by the same
company as the covered IDI? Should two IDIs be treated as affiliates
only if they are under the common control of a company (as opposed to a
natural person)? What are the advantages and disadvantages of making
subject to the proposed rule all affiliated IDIs as compared to only
those that are consolidated by the same company as the covered IDI?
Question 20: Under the proposal, an IDI with less than $100 billion
in total consolidated assets would be subject to the proposed rule if
it is affiliated with an IDI that has at least $100 billion in total
assets, including when the two IDIs are not consolidated by the same
holding company or the two IDIs are commonly controlled by a natural
person. Should the proposed rule include a minimum size requirement for
such an affiliated IDI to be subject to the proposed rule? For example,
should only affiliated IDIs with at least an amount of assets set
between $1 billion and $50 billion be subject to the proposed rule?
What would be an appropriate threshold, or are there other parameters
the proposed rule should employ to establish when an affiliated IDI
would be subject to the proposed rule? As an alternative to an asset
size threshold or other parameter, should the agencies consider
reserving the authority to exempt certain IDIs from the LTD
requirement?
B. Calibration of Covered IDI LTD Requirement
Under the proposal, a covered IDI would be required to maintain
outstanding eligible LTD in an amount that is the greater of 6.0
percent of the covered IDI's total risk-weighted assets, 3.5 percent of
its average total consolidated assets,\36\ and 2.5 percent of its total
leverage exposure if the covered IDI is subject to the supplementary
leverage ratio.\37\
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\36\ For purposes of the LTD minimum requirement, average total
consolidated assets is defined as the denominator of the agencies'
tier 1 leverage ratio requirement. See 12 CFR 3.10(b)(4) (OCC), 12
CFR 217.10(b)(4) (Board), 12 CFR 324.10(b)(4) (FDIC).
\37\ See 12 CFR 3.10(c)(2) (OCC), 12 CFR 217.10(c)(2) (Board),
12 CFR 324.10(c)(2) (FDIC).
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The proposed IDI LTD requirement is calibrated by reference to the
covered IDI's balance sheet and to ensure that sufficient LTD would be
available at the covered IDI. The IDI LTD requirement is also
calibrated to help ensure that the resolution of a covered IDI does not
impose unduly high costs on the economy.
The proposed IDI LTD requirement has been calibrated so that,
assuming a failed covered IDI's equity capital is significantly or
completely depleted, the eligible LTD outstanding would be sufficient
to capitalize a newly-formed bridge depository institution with an
amount necessary to comply with the minimum leverage capital
requirements and common equity tier 1 risk-based capital requirements
plus buffers applicable to ordinary non-bridge IDIs after accounting
for some balance sheet depletion.
The proposed calibration would appropriately support the FDIC in
resolving covered IDIs under the FDI Act because the eligible LTD at
the IDI could improve market confidence, improve the marketability of
the failed IDI, and stabilize the bridge depository institution,
thereby providing more optionality in resolution. Importantly, it could
also provide for an exit from resolution by enabling a recapitalized
bridge depository institution to exit from resolution as a newly
chartered IDI following a period of stabilization and restructuring.
The amount of LTD required to be positioned at the covered IDI is
based upon the balance sheet of the covered IDI and will reflect the
size and importance of the covered IDI relative to the group. Thus, it
improves the optionality of resolution at an IDI level while also
potentially supporting an SPOE resolution of the covered entity in the
event that option is available and would be effective.\38\ Externally
issuing IDIs would be subject to the same calibration as other covered
IDIs, as they can have similar risk profiles, asset compositions, and
liability structures as other covered IDIs and hence should have
similar resolution-related resource needs.
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\38\ For example, in an SPOE resolution, if the covered IDI is a
consolidated subsidiary of a covered entity, the covered entity
could support the covered IDI by forgiving the eligible internal LTD
issued by the covered IDI.
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The proposed rule would authorize an agency to require a covered
IDI that it supervises to maintain an amount of eligible LTD that is
greater than the minimum requirement in the proposed rule under certain
circumstances. This would ensure that a covered IDI that presents
elevated risk that the proposed rule seeks to address would be required
to maintain a corresponding amount of eligible LTD.
The proposed rule would include a provision that would allow the
appropriate Federal banking agency, after providing a covered IDI with
notice and an opportunity to respond, to order the covered IDI to
exclude from its outstanding eligible LTD any otherwise eligible debt
securities with features that would significantly impair the ability of
such debt securities to absorb losses in resolution.\39\
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\39\ See 12 CFR 3.404 (OCC), 12 CFR 263.83 (Board), and 12 CFR
324.5(c) (FDIC).
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In addition, the appropriate Federal banking agency could take an
enforcement action against a covered IDI for falling below a minimum
IDI LTD requirement. This would be consistent with the agencies'
authority to pursue enforcement actions for violations of law, rules,
or regulations.
Question 21: What alternative calibrations should the agencies
consider for the IDI LTD requirement? What other factors should the
agencies consider in determining the appropriate calibration? The
proposed rule would require covered IDIs to maintain an amount of LTD
so that, if the LTD were written off, it would recapitalize a covered
IDI to the well capitalized standards for IDIs under the common equity
tier 1 risk-based capital requirements (after accounting for expected
balance sheet depletion). What would be the advantages and
disadvantages of requiring a covered IDI to maintain an amount of LTD
that would be sufficient to recapitalize the covered IDI to ``well-
capitalized'' standards relative to (1) tier-1 risk-based capital
requirements, (2) total risk-based capital requirements, and (3)
average total consolidated assets under the
[[Page 64534]]
agencies' prompt corrective action standards in the event of failure?
Question 22: What would be the advantages and disadvantages of
proposing a different calibration for mandatory and permitted
externally issuing IDIs, which do not have a parent holding company
that is subject to an external LTD requirement?
Question 23: How should the calibration for the IDI LTD requirement
relate, if at all, to the level of uninsured deposits outstanding at a
covered IDI, either in absolute terms or relative to the IDI's
liabilities? If such an approach were taken, at what level(s) of
uninsured deposits should the agencies modify the calibration for the
IDI LTD requirement?
Question 24: The agencies are considering whether and how to
specify a period for covered IDIs to raise additional LTD after the
entity has been involved in a situation in which the FDIC has been
appointed receiver. What are the advantages or disadvantages of
permitting a period for the covered IDI to raise additional LTD
following such an event? How long should such a period reasonably be?
V. Features of Eligible LTD
The proposal would require LTD to satisfy certain eligibility
criteria to qualify as eligible LTD. Although the requirements for all
eligible LTD generally would be the same under the proposed rule,
eligible external LTD would have certain features not applicable to
eligible LTD issued within a consolidated organization (eligible
internal LTD). As discussed above, covered HCs and mandatory externally
issuing IDIs may only issue eligible external LTD to satisfy the
proposed LTD requirement. Internally issuing IDIs and nonresolution
covered IHCs must issue eligible internal LTD, while permitted
externally issuing IDIs and resolution covered IHCs may issue either
(see section V, subsection C for discussion of nonresolution and
resolution covered IHCs). The general purpose of these requirements is
to ensure that LTD used to satisfy the proposed rule is in fact able to
be used effectively and appropriately to absorb losses in support of
the orderly resolution of the issuer. The proposed requirements for
eligible LTD are generally the same as those required for firms subject
to the TLAC rule.\40\
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\40\ See 12 CFR 252.61 and .161 ``Eligible debt security.''
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Question 25: What are the advantages and disadvantages of limiting
the types of instruments that qualify as eligible LTD? Would any of the
proposed required features for eligible LTD be unnecessary or
counterproductive as applied to any of the covered entities or covered
IDIs? If so, explain why.
A. Eligible External LTD
Under the proposed rule, eligible external LTD issued by covered
HCs, mandatory and permitted externally issuing IDIs, and resolution
covered IHCs (together, external issuers) must be paid in and issued
directly by the external issuer, be unsecured, have a maturity of
greater than one year from the date of issuance, have ``plain vanilla''
features (that is, the debt instrument has no features that would
interfere with a smooth resolution proceeding), be issued in a minimum
denomination of $400,000, and be governed by U.S. law.\41\ In addition,
principal due to be paid on eligible external LTD in one year or more
and less than two years would be subject to a 50 percent haircut for
purposes of the external LTD requirement. Principal due to be paid on
eligible external LTD in less than one year would not count toward the
external LTD requirement. Tier 2 capital that meets the definition of
eligible external LTD would continue to count toward the external LTD
requirement.
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\41\ If a national bank or Federal savings association intends
for LTD to qualify as tier 2 capital, the instrument must also
satisfy the requirements for subordinated debt at 12 CFR 5.47 (for
national banks) and 12 CFR 5.56 (for Federal savings associations).
If the national bank or Federal savings association does not intend
to treat the LTD as subordinated debt that qualifies as tier 2
capital, the LTD does not need to satisfy these requirements. In any
event, all offers and sales of securities by a national bank or
Federal savings association are subject to the disclosure
requirements set forth at 12 CFR part 16.
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Consistent with this purpose, the proposed rule would authorize the
agencies, after providing an external issuer with notice and an
opportunity to respond, to order the external issuer to exclude from
its outstanding LTD amount any otherwise eligible debt securities with
features that would significantly impair the ability of such debt
securities to absorb losses in resolution.\42\ This provision would
enable the agencies to respond to new types of LTD instruments,
ensuring the proposed rule remains responsive to developments in LTD
instruments.
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\42\ The Board would exercise this authority with respect to
covered entities. For covered IDIs, a bank's primary Federal banking
agency would exercise this authority.
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1. External Debt Issuance Directly by Covered Entities and Covered IDIs
Eligible external LTD would be required to be paid in and issued
directly by the external issuer. Thus, debt instruments issued by a
subsidiary of a covered entity or covered IDI would not qualify as
eligible external LTD.
The requirement that eligible external LTD be issued directly by
the covered entity or covered IDI and not a subsidiary would serve
several purposes. In the case of eligible external LTD issued by a
covered entity that is in turn matched by eligible internal LTD at a
covered IDI subsidiary, the requirement would make sure that the
covered entity has an amount of stable funding that is sourced
externally and that could be used to purchase the LTD issued by the
covered IDI subsidiary to meet the IDI's minimum LTD requirement.
Additionally, requiring eligible external LTD to be issued by the
covered entity (or, in the case of a permitted or mandatory externally
issuing IDI, the covered IDI) and not a subsidiary would simplify
administration of the proposed rule by preventing a banking
organization from issuing external LTD from multiple entities, which
could complicate the firm's internal monitoring and examiner monitoring
for compliance with the proposed rule. This requirement also would take
advantage of the fact that, within a consolidated organization, the
holding company generally is the entity used as a capital raising
vehicle.
Finally, for external issuers that are covered entities, issuance
directly from the covered entity and not a subsidiary would provide
flexibility to support a range of resolution strategies. For instance,
use by an external issuer (such as a covered HC) of proceeds from the
issuance of eligible external LTD to purchase eligible internal LTD
from a covered IDI subsidiary would support resolution of the covered
IDI under the FDI Act. Where SPOE is an available option, the issuer's
eligible external LTD could be used to absorb losses incurred
throughout the banking organization, enabling the recapitalization of
operating subsidiaries that had incurred losses and enabling those
subsidiaries to continue operating on a going-concern basis. For an
SPOE approach to be implemented successfully, the eligible external LTD
must be issued directly by the covered entity because debt issued by a
subsidiary generally cannot be used to absorb losses, even at the
issuing subsidiary itself, unless that subsidiary enters a resolution
proceeding.
Eligible external LTD also may only be held by certain investors.
In the case of covered entities, eligible external LTD must be held by
a nonaffiliate. The requirement for eligible external LTD to not be
held by an affiliate ensures that LTD issuance generates new loss-
absorbing capacity that is truly held
[[Page 64535]]
externally from the issuer. This requirement also helps ensure that LTD
holders are positioned to serve as a source of market discipline for
the external issuer. LTD holders may be less likely to critically
monitor the performance of the issuer if the holders are affiliated
with the issuer. Eligible external LTD issued by a permitted or
mandatory externally issuing IDI likewise could not be issued to an
affiliate, except an affiliate that controls but does not consolidate
the covered IDI (e.g., where a company owns at least 25 percent of, but
does not meet the accounting standard to consolidate, a covered IDI).
Without this exception for upstream affiliates, eligible LTD of a
permitted externally issuing IDI could be held by a company that
consolidates the covered IDI (in the form of eligible internal LTD),
but not a company that controls without consolidating the covered IDI.
Such a prohibition would serve no purpose. Accordingly, the proposal
permits a permitted or mandatory externally issuing IDI to issue
eligible external LTD to such an affiliate.
2. Unsecured
Eligible external LTD would be required to be unsecured, not
guaranteed by the external issuer or a subsidiary or an affiliate of
the external issuer, and not subject to any other arrangement that
legally or economically enhances the seniority of the instrument (such
as a credit enhancement provided by an affiliate).
The primary rationale for these restrictions is to ensure that
eligible external LTD can serve its intended purpose of absorbing
losses incurred by the banking organization in resolution. To the
extent that a creditor is secured, or provided with credit support of
any type, it can avoid suffering losses by seizing the collateral that
secures the debt. The debt being secured would thwart the purpose of
eligible external LTD by leaving losses with the external issuer (which
would lose the collateral) rather than imposing them on the eligible
external LTD creditor (which could take the collateral). As a result,
this requirement ensures that losses can be imposed on eligible LTD in
resolution in accordance with the standard creditor hierarchy under
bankruptcy or an FDI Act resolution, under which secured creditors are
paid ahead of unsecured creditors.
A secondary purpose of these restrictions is to prevent eligible
external LTD from contributing to the asset fire sales that can occur
when a financial institution fails and its secured creditors seize and
liquidate collateral. Asset fire sales can drive down the value of the
assets being sold, which can undermine financial stability by
transmitting financial stress from the failed firm to other entities
that hold similar assets.
3.``Plain Vanilla''
Eligible external LTD instruments would be required to be ``plain
vanilla'' instruments. Exotic features could create complexity and
thereby diminish the prospects for an orderly resolution of the
external issuer. These limitations would help to ensure that eligible
external LTD represents loss-absorbing capacity with a definite value
that can be quickly determined in resolution. In a resolution
proceeding, claims represented by such ``plain vanilla'' debt
instruments are more easily ascertainable and relatively certain
compared to more complex and volatile instruments. Permitting exotic
features could engender uncertainty as to the level of the issuer's
loss-absorbing capacity and could increase the complexity of the
resolution proceeding and potentially result in a disorderly
resolution.
Under the proposed rule, external LTD instruments would be excluded
from treatment as eligible external LTD if they: (i) are structured
notes; (ii) have a credit-sensitive feature; (iii) include a
contractual provision for conversion into or exchange for equity in the
issuer; or (iv) include a provision that gives the holder a contractual
right to accelerate payment (including automatic acceleration), other
than a right that is exercisable (1) on one or more dates specified in
the instrument, (2) in the event of the issuer entering into insolvency
or resolution proceedings, or (3) the issuer's failure to make a
payment on the instrument when due that continues for 30 days or
more.\43\
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\43\ This limitation would be subject to an exception that would
permit eligible external LTD instruments to give the holder a future
put right as of a date certain, subject to the provisions discussed
below regarding when the debt is due to be paid.
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a. Structured Notes
The proposed rule would exclude structured notes, including
principal-protected structured notes, from treatment as eligible
external LTD. Structured notes contain features that could make their
valuation uncertain, volatile, or unduly complex. In addition, they are
often liabilities held by retail investors (as opposed to institutional
investors) and, as discussed in greater detail below in the context of
minimum denomination requirements, holdings of LTD by more
sophisticated investors can better ensure that LTD holders understand
the risks of LTD and that such holders are in a position to provide
market discipline with respect to LTD issuers. To promote resiliency
and market discipline, it is important that external issuers maintain a
minimum amount of loss-absorbing capacity with a value that is easily
ascertainable at any given time. Moreover, in resolution, debt
instruments that will be subjected to losses must be capable of being
valued accurately and with minimal risk of dispute. The requirement
that eligible external LTD not contain the features associated with
structured notes advances these goals.
For purposes of the proposed rule, a ``structured note'' is defined
as a debt instrument that: (i) has a principal amount, redemption
amount, or stated maturity that is subject to reduction based on the
performance of any asset,\44\ entity, index, or embedded derivative or
similar embedded feature; (ii) has an embedded derivative or similar
embedded feature that is linked to one or more equity securities,
commodities, assets, or entities; (iii) does not have a minimum
principal amount that becomes due and payable upon acceleration or
early termination; or (iv) is not classified as debt under U.S. GAAP.
The definition of a structured note does not include a non-dollar-
denominated instrument or an instrument whose interest payments are
based on an interest rate index (for example, a floating-rate note
linked to the Federal funds rate or to the secured overnight financing
rate), in each case that satisfies the proposed requirements in all
other respects.
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\44\ Assets would include loans, debt securities, and other
financial instruments.
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Structured notes with principal protection often combine a zero-
coupon bond, which pays no interest until the bond matures, with an
option or other derivative product, whose payoff is linked to an
underlying asset, index, or benchmark.\45\ For external issuances by
covered entities, the derivative feature violates the intent of the
clean holding company requirements (described below), which prohibit
derivatives entered into by covered entities with third parties.
Moreover, investors in structured notes tend to pay less attention to
issuer credit risk than investors in other LTD, because structured note
investors use structured notes to gain exposure unrelated to the
[[Page 64536]]
market discipline objective of the minimum LTD requirements.
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\45\ U.S. Securities and Exchange Commission, Structured Notes
with Principal Protection: Note the Terms of Your Investment (June
1, 2011), <a href="https://www.sec.gov/investor/alerts/structurednotes.htm">https://www.sec.gov/investor/alerts/structurednotes.htm</a>.
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b. Contractual Provision for Conversion Into or Exchange for Equity
The proposed rule would exclude from treatment as eligible external
LTD debt that includes contractual provisions for its conversion into
equity or for it to be exchanged for equity. The fundamental objective
of the external LTD requirement is to ensure that external issuers will
have a minimum amount of loss-absorbing capacity available to absorb
losses upon the issuer's entry into resolution. Debt instruments that
could convert into equity prior to resolution may not serve this goal,
since the conversion would reduce the amount of debt that will be
available to absorb losses in resolution. In addition, debt with
features to allow conversion into equity is often complex and thus may
not be characterized as ``plain vanilla.'' Convertible debt instruments
may be viewed as debt instruments with an embedded equity call option.
The embedded equity call option introduces a derivative-linked feature
to the debt instrument that is inconsistent with the purpose of the
clean holding company requirements (described below) and introduces
uncertainty and complexity into the value of such securities. For these
reasons, eligible external LTD may not include contractual provisions
allowing for its conversion into equity or for it to be exchanged for
equity prior to the issuer's resolution under the proposed rule.
c. Credit-Sensitive Features and Acceleration Clauses
Under the proposal, eligible external LTD cannot have a credit-
sensitive feature or provide the holder of the instrument a contractual
right to the acceleration of payment of principal or interest at any
time prior to the instrument's stated maturity (an acceleration
clause), other than upon the occurrence of either a receivership,
liquidation, or similar proceeding,\46\ or a payment default event.
However, eligible external LTD instruments would be permitted to give
the holder a put right as of a future date certain, subject to the
remaining maturity provisions discussed below.
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\46\ For the avoidance of doubt, this provision should not be
construed to mean that eligible external LTD could be accelerated
upon an IDI merely being insolvent.
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The restriction on acceleration clauses serves the same purpose as
several of the other restrictions discussed above, i.e., to ensure that
the required amount of LTD will indeed be available to absorb losses in
resolution. Early acceleration clauses, including cross-acceleration
clauses, could undermine an orderly resolution by forcing the issuer to
make payment on the full value of the debt prior to the entry of the
issuer into resolution, potentially depleting the issuer's eligible
external LTD immediately prior to resolution. This concern does not
apply to acceleration clauses that are triggered by an insolvency or
resolution event, however, because the insolvency or resolution that
triggers the clause would generally occur concurrently with the
issuer's entry into an insolvency or a resolution proceeding.
Senior debt instruments issued by external issuers commonly also
include payment default event clauses. These clauses provide the holder
with a contractual right to accelerate payment upon the occurrence of a
``payment default event''--that is, a failure by the issuer to make a
required payment when due. Payment default event clauses, which are not
permitted in tier 2 regulatory capital, raise more concerns than
insolvency or resolution event clauses because a payment default event
may occur (triggering acceleration) before the institution has entered
a resolution proceeding and a stay has been imposed. Such a pre-
resolution payment default event could cause a decline in the issuer's
loss-absorbing capacity.
Nonetheless, the proposed rule would permit eligible external LTD
to be subject to payment default event acceleration rights for two
reasons. First, default or acceleration rights upon a borrower's
default on its direct payment obligations are a standard feature of
senior debt instruments, such that a prohibition on such rights could
be unduly disruptive to the potential market for eligible external LTD.
Second, the payment default of an issuer on an eligible external LTD
instrument would likely be a credit event of such significance that
whatever diminished capacity led to the payment default event would
also be a sufficient trigger for an insolvency or a resolution event
acceleration clause, in which case a prohibition on payment default
event acceleration clauses would have little or no practical effect.
In addition, the proposed rule would provide that an acceleration
clause relating to a failure to pay principal or interest must include
a ``cure period'' of at least 30 days. During this cure period, the
issuer could make payment on the eligible external LTD before such debt
could be accelerated and if the issuer satisfies its obligations on the
eligible external LTD within the cure period, the instrument could not
be accelerated. This would ensure that an accidental or temporary
failure to pay principal or interest does not trigger immediate
acceleration. Moreover, this cure period for interest payments is found
in many existing debt instruments and is consistent with current market
practice.
4. Minimum Remaining Maturity and Amortization
Under the proposal, the amount of eligible external LTD that is due
to be paid between one and two years would be subject to a 50 percent
haircut for purposes of the external LTD requirement, and the amount of
eligible external LTD that is due to be paid in less than one year
would not count toward the external LTD requirement.
The purpose of these restrictions is to limit rollover risk of debt
instruments that qualify as eligible external LTD and ensure that
eligible external LTD provides stable funding and will be reliably
available to absorb losses in the event that the issuer fails and
enters resolution. Debt that is due to be paid in less than one year
does not adequately serve these purposes because of the possibility
that the debt could mature during the period between the time when the
issuer begins to experience extreme stress and the time when it enters
a resolution proceeding. If the debt matures during that period, then
it would be likely that the creditors would be unwilling to maintain
their exposure to the issuer and would therefore refuse to roll over
the debt or extend new credit, and the distressed issuer would likely
be unable to replace the debt with new LTD that would be available to
absorb losses in resolution. This run-off dynamic could result in a
case where the covered entity enters resolution with materially less
loss-absorbing capacity than would be required to support or
recapitalize its IDIs or other subsidiaries, potentially resulting in a
disorderly resolution. To protect against this outcome, eligible
external LTD would cease to count toward the external LTD requirement
upon being due to be paid in less than one year, so that the full
required amount of loss-absorbing capacity would be available in
resolution even if the resolution period were preceded by a year-long
stress period.\47\
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\47\ This requirement also accords with market convention, which
generally defines ``long-term debt'' as debt with maturity in excess
of one year.
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For the same reasons, eligible external LTD that is due to be paid
in less than two years but greater than or equal to one year is subject
to a 50 percent haircut under the proposed rule for
[[Page 64537]]
purposes of the external LTD requirement, meaning that only 50 percent
of the value of its principal amount would count toward the external
LTD requirement. This amortization provision is intended to protect an
issuer's loss-absorbing capacity against a run-off period in excess of
one year (as might occur during a financial crisis or other protracted
stress period) in two ways. First, it requires issuers that rely on
eligible external LTD that is vulnerable to such a run-off period
(because it is due to be paid in less than two years) to maintain
additional loss-absorbing capacity in the form of eligible external
LTD. Second, it leads issuers to reduce or eliminate their reliance on
loss-absorbing capacity that is due to be paid in less than two years.
An issuer could reduce its reliance on eligible external LTD that is
due to be paid in less than two years by staggering its issuance, by
issuing eligible external LTD that is due to be paid after a longer
period, or by redeeming and replacing eligible external LTD once the
residual maturity falls below two years.
The proposed rule also provides similar treatment for eligible
external LTD that could become subject to a ``put'' right--that is, a
right of the holder to require the issuer to redeem the debt on
demand--prior to reaching its stated maturity. Such an instrument would
be treated as if it were due to be paid on the day on which it first
became subject to the put right, since on that day the creditor would
be capable of demanding payment and thereby subtracting the value of
the instrument from the issuer's loss-absorbing capacity.\48\
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\48\ The date on which principal is due to be paid would be
calculated from the date the put right would first be exercisable
regardless of whether the put right would be exercisable on that
date only if another event occurred (e.g., a credit rating
downgrade).
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5. Governing Law
Eligible external LTD instruments would be required to consist only
of liabilities that can be effectively used to absorb losses during the
resolution of the external issuer without giving rise to material risk
of successful legal challenge. To this end, the proposal would require
eligible external LTD to be governed by the laws of the United States
or any State.\49\ LTD that is subject to foreign law would potentially
be subject to legal challenge in a foreign jurisdiction, which could
jeopardize the orderly resolution of the issuer. Foreign courts might
not defer to actions of U.S. courts or U.S. resolution authorities that
would impair the eligible LTD, for example, where such actions
negatively impact foreign bondholders or foreign shareholders. While
the presence of recognition regimes abroad does improve the likelihood
that these actions would be enforced, it does not guarantee it.
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\49\ Consistent with the definition of ``State'' in the TLAC
rule and the Board's Regulation YY, ``State'' would be defined to
mean ``any state, commonwealth, territory, or possession of the
United States, the District of Columbia, the Commonwealth of Puerto
Rico, the Commonwealth of the Northern Mariana Islands, American
Samoa, Guam, or the United States Virgin Islands.'' See 12 CFR
252.2.
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6. Minimum Denomination and Investor Limitations
The proposed rule also would require eligible external LTD to be
issued through instruments with minimum principal denominations and
would exclude from eligible external LTD instruments that can be
exchanged by the holder for smaller denominations.\50\ The purpose of
this requirement is to limit direct investment in eligible LTD by
retail investors. Significant holdings of LTD by retail investors may
create a disincentive to impose losses on LTD holders, which runs
contrary to the agencies' intention that LTD holders expect to absorb
losses in resolution after equity shareholders. Imposing requirements
that will tend to limit investments in LTD to more sophisticated
investors will help ensure that LTD holders will monitor the
performance of the issuer and thus support market discipline. These
more sophisticated investors are more likely to appreciate that LTD
that satisfies the requirements of the proposed rule may present
different risks than other types of debt instruments issued by covered
entities, covered IDIs, or other firms.
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\50\ The Board also is proposing to introduce an identical
requirement for external LTD issued pursuant to the TLAC rule, as
discussed in Section IX.B below.
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The agencies propose setting the minimum denomination requirement
at $400,000. A required minimum denomination of $400,000 would fall in
the range of reasonable minimum denomination levels described below and
would generally disincentivize direct holdings of such investments by
retail investors without preventing institutional investors from
purchasing eligible external LTD. In the agencies' experience, most
institutional investors are able to purchase instruments in minimum
denominations of $400,000. In addition, according to the 2019 Survey of
Consumer Finances, the median value of the total portfolio of directly-
held bonds for households that had at least one bond and had household
incomes in the 90th to 100th percentiles was $400,000.\51\ Setting the
minimum denomination at this level would likely substantially limit the
amount of households that would directly invest in eligible LTD.
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\51\ Board of Governors of the Federal Reserve System, Changes
in U.S. Family Finances from 2016 to 2019: Evidence from the Survey
of Consumer Finances (Sept. 2020), <a href="https://www.federalreserve.gov/publications/files/scf20.pdf">https://www.federalreserve.gov/publications/files/scf20.pdf</a>. This number reflects households that
have at least one bond. In this context, ``bonds'' include only
those held directly (not part of a managed investment account or
bond fund) and include corporate and mortgage-backed bonds; Federal,
state, and local government bonds; and foreign bonds. Id.
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The agencies considered alternative minimum denomination thresholds
between $100,000 and $1 million. There are several arguments to support
the reasonableness of a minimum denomination requirement at thresholds
between $100,000 and $1 million. Setting the minimum denomination at
$100,000 would likely result in well over half of retail investors not
participating in the market for direct purchases of eligible LTD, which
would meaningfully accomplish the agencies' goal of generally reducing
the degree of direct retail investor holdings of eligible LTD.
According to the Survey of Consumer Finances, the median value of the
total portfolio of directly-held bonds for households that had at least
one bond in 2019 was $121,000.\52\ If eligible LTD is issued in minimum
denominations of $100,000, it would be possible but unlikely that a
household that directly holds an aggregate amount of individual bonds
equal to this $121,000 figure would include within such holdings any
eligible LTD instruments because, in that case, the minimum
denomination associated with the eligible LTD instrument would cause
such instrument to represent nearly the entirety of such bond holdings.
A minimum denomination requirement of $1 million could therefore also
be reasonable. As noted above, the 2019 Survey of Consumer Finances
found that the median value of the aggregate amount of individual,
directly-held bonds for households that held at least one bond and with
household incomes in the 90th to 100th percentiles was $400,000.\53\
Setting the minimum denomination threshold at $1 million could thus be
expected to exclude most households. The agencies also would not expect
a minimum $1 million denomination requirement to exclude a material
number of institutional investors from purchasing LTD.
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\52\ Id.
\53\ Id.
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[[Page 64538]]
Question 26: What would be the advantages and disadvantages of
limiting direct retail investor exposure to eligible external LTD? To
what extent would retail investors be likely to directly own eligible
external LTD? Do retail investors, investing on a direct basis as
opposed to through institutional funds, constitute a substantial
portion of the market for debt instruments such as eligible external
LTD, such that prohibiting their direct investment would meaningfully
reduce the market for eligible LTD?
Question 27: To what extent would limiting direct retail holdings
of eligible external LTD contribute to concentration of eligible
external LTD holdings by certain market participants?
Question 28: What minimum denomination amount is most appropriate
in the range of $100,000 to $1 million? Would an amount greater than
$400,000 be appropriate to provide further assurance these instruments
will generally be held by investors who are well positioned to exercise
market discipline and bear loss in the event of the failure of the
issuer? Should the agencies require the debt instrument for eligible
LTD to expressly prohibit their exchange into smaller denominations?
Please explain.
Question 29: What would be the advantages and disadvantages to
limiting indirect exposures to eligible LTD by retail investors?
7. Subordination of Eligible LTD Issued by IDIs
The proposed rule would require eligible LTD issued by a covered
IDI to be contractually subordinated so that the claim represented by
the LTD in the receivership of the IDI would be junior to deposit and
general unsecured claims.\54\ This requirement would ensure that
eligible LTD absorbs losses prior to depositors and other unsecured
creditors, which increases the FDIC's optionality when acting as a
receiver for a failed IDI. For example, as discussed above, the
presence of eligible LTD at an IDI would increase the likelihood that
the FDIC could transfer all of the deposit liabilities (insured and
uninsured) of a failed bank to a bridge depository institution, thereby
preserving the IDI's franchise value.
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\54\ The proposed rule would define ``deposits'' to have the
same meaning as in the FDI Act. See 12 U.S.C. 1813(l). The eligible
LTD would rank in priority in an FDIC receivership after deposits
and general unsecured liabilities, as established at 12 U.S.C.
1821(d)(11)(A)(iv).
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Requiring contractual subordination would also provide further
clarity about the priority of the claim represented by eligible LTD in
a receivership of the issuing institution, which facilitates an orderly
resolution. The FDIC may need to transfer certain general unsecured
claims, which could include trade creditors (if any) and non-dually-
payable foreign deposits,\55\ to a newly-established bridge depository
institution in order to facilitate its operations. By requiring that
eligible LTD issued by IDIs be contractually subordinated to general
unsecured creditor claims, the eligible LTD would also serve to protect
those claims, providing greater optionality to the FDIC in structuring
a resolution. While the eligible LTD requirement for covered entities
does not include a contractual subordination requirement, in the case
that the IDI fails, eligible LTD issued by covered entities will be
structurally subordinated to creditor claims against the subsidiary
IDI.
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\55\ See Final Rule on ``Deposit Insurance Regulations;
Definition of Insured Deposit,'' 78 FR 56583 (Sept. 13, 2013),
<a href="https://www.govinfo.gov/content/pkg/FR-2013-09-13/pdf/2013-22340.pdf">https://www.govinfo.gov/content/pkg/FR-2013-09-13/pdf/2013-22340.pdf</a>.
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Question 30: What would be the advantages and disadvantages of
requiring eligible LTD issued by covered IDIs to be subordinated to
general unsecured creditors? What implications, if any, would
subordination of eligible LTD to general unsecured creditors have for
other requirements?
Question 31: What are the advantages and disadvantages of limiting
the types of instruments that qualify as eligible external LTD? Would
any of the proposed features for eligible external LTD not be
appropriate for any covered entities or covered IDIs? What
characteristics of the specific types of institutions required to issue
internal LTD under the proposed rule would caution against requiring
eligible internal LTD to meet any of the proposed eligibility
requirements?
B. Eligible Internal LTD
The requirements for eligible internal LTD are generally the same
as those for eligible external LTD. However, eligible internal debt
securities are subject to two key distinctions from eligible external
debt securities under the proposed rule. First, eligible internal LTD
issued by an IDI must be issued to and remain held by a company that
consolidates the covered IDI, generally an upstream parent. Second,
eligible internal LTD would not be subject to the minimum principal
denomination requirement. As discussed further below, eligible internal
LTD issued by a covered IHC would be required to include a contractual
conversion trigger and would not include a prohibition against credit
sensitive features.
Where a covered IDI issues eligible internal LTD, such eligible
internal LTD would be required to be paid in and issued to a company
that consolidates the covered IDI.\56\ This helps ensure that eligible
internal LTD issued by the covered IDI is supported by stable funding
from its parent, which in turn is generally required to issue eligible
external LTD. Accordingly, a covered entity could use the proceeds from
the issuance of external LTD to purchase internal LTD issued by its IDI
subsidiary.
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\56\ As discussed above, permitted externally issuing IDIs would
be permitted to issue eligible LTD to affiliates and to
nonaffiliates.
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For a covered IDI that is a consolidated subsidiary of a covered
IHC, the proposed rule would require that eligible internal LTD of the
covered IDI be issued to the covered IHC, or a subsidiary of the
covered IHC that consolidates the IDI. In other words, to constitute
eligible internal LTD, the LTD of such an IDI could not be directly
issued to a foreign affiliate that controls the IDI; doing so would
mean that losses could be imposed on foreign affiliates through the
IDI's LTD, rather than passing up to the covered IHC, which in turn has
issued outstanding loss-absorbing LTD. This requirement is consistent
with the design of internal eligible LTD issued by a covered IHC to its
foreign parent or a wholly owned subsidiary of that foreign parent.
Internal LTD issued by a covered IHC to a foreign parent must contain a
contractual conversion trigger, which is discussed below.
Certain covered IHCs that would not be expected to enter into
resolution upon the failure of their parent FBOs would be required to
issue eligible internal LTD to a foreign company that directly or
indirectly controls the covered IHC, or to a wholly owned subsidiary of
a controlling foreign company.\57\ This would ensure that losses
incurred by a covered IHC would be distributed to a foreign affiliate
that is not a subsidiary of the covered IHC, which would allow the
foreign top-tier parent to manage the resolution strategy for its
global operations and manage
[[Page 64539]]
how the IHC would fit into this global resolution strategy. The
requirement also would mitigate the risk that conversion of the
eligible LTD to equity, as discussed below, would result in a change in
control of the covered IHC, which could create additional regulatory
and management complexity during a failure scenario.
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\57\ Consistent with the TLAC rule, a ``wholly owned
subsidiary'' of a FBO would be one where the foreign parent owns 100
percent of the subsidiary's outstanding ownership interests, except
that 0.5 percent could be owned by a third party for purposes of
establishing corporate separateness or addressing bankruptcy,
insolvency, or similar concerns. This recognizes the practice of
FBOs to own all but a small part of a subsidiary for corporate
practice purposes with which the proposed rule is not intended to
interfere. Moreover, allowing a very small amount of a foreign
parent's subsidiary to be owned by a third party would not undermine
the purposes of this proposed rule.
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The proposed rule would not require eligible internal LTD to be
issued in minimum denominations. As discussed above, the purpose of the
minimum denomination requirement is to increase the chances that LTD
holders are sophisticated investors that can provide market discipline
for covered entities and covered IDIs. These concerns do not apply in
the case of eligible internal LTD, which by definition cannot be held
by retail or outside investors.
Question 32: What would be the advantages and disadvantages of
permitting all covered IDIs (or certain covered IDIs other than just
mandatory or permitted externally issuing IDIs) to satisfy their LTD
requirements with external LTD? If covered IDIs were able to satisfy
their LTD requirements with external LTD, what would be the advantages
and disadvantages of permitting any such eligible external LTD to count
towards the LTD requirement of the covered IDI's consolidating parent?
Question 33: What are the advantages and disadvantages of
permitting a covered IDI to issue eligible internal LTD to additional
non-subsidiary affiliates, beyond consolidating parent entities?
Question 34: What are the advantages and disadvantages of limiting
the types of instruments that qualify as eligible internal LTD? Which,
if any, of the proposed features for eligible internal LTD instruments
would not be appropriate for covered IDIs or covered IHCs and why? What
characteristics of any specific types of entities required to issue
internal LTD under the proposed rule would caution against requiring
eligible internal LTD to meet any of the proposed eligibility
requirements?
C. Special Considerations for Covered IHCs
The proposed rule would set forth certain requirements for eligible
internal LTD that are specific to covered IHCs. Specifically, the
proposed rule would require certain covered IHCs to issue only eligible
internal LTD, where the resolution strategy of the covered IHC's
foreign parent follows an SPOE model. In addition, eligible internal
LTD issued by covered IHCs must include a contractual provision that is
approved by the Board that provides for immediate conversion or
exchange of the instrument into common equity tier 1 capital of the
covered IHC upon issuance by the Board of an internal debt conversion
order. Finally, eligible internal LTD issued by covered IHCs would not
be subject to a prohibition on credit-sensitive features.
Only certain covered IHCs would have the option to issue debt
externally to third-party investors. Specifically, covered IHCs of FBOs
with a top-tier group-level resolution plan that contemplates their
covered IHCs or subsidiaries of their covered IHCs entering into
resolution, receivership, insolvency, or similar proceedings in the
United States (resolution covered IHCs), are permitted to issue
eligible LTD externally. Such resolution covered IHCs are more
analogous to covered HCs, because both have established resolution
plans that involve these entities entering resolution proceedings in
the United States. Covered IHCs of FBOs with top-tier group-level
resolution plans that do not contemplate their covered IHCs or the
subsidiaries of their covered IHCs entering into resolution,
receivership, insolvency, or similar proceedings (non-resolution
covered IHCs) must issue LTD internally within the FBO, from the
covered IHC to a foreign parent or a wholly owned subsidiary of the
foreign parent.
1. Identification as a Resolution or Non-Resolution Covered IHC
This proposal would require the top-tier FBO of a covered IHC to
certify to the Board whether the planned resolution strategy of the
top-tier FBO involves the covered IHC or its subsidiaries entering
resolution, receivership, insolvency, or similar proceedings in the
United States. The certification must be provided by the top-tier FBO
to the Board six months after the effective date of the final rule. In
addition, the top-tier FBO with a covered IHC must provide an updated
certification to the Board upon a change in resolution strategy. The
proposed identification process is similar to the process used for U.S.
IHCs subject to the TLAC rule.\58\
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\58\ See 12 CFR 252.164.
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A covered IHC is a ``resolution covered IHC'' under the proposed
rule if the certification provided indicates that the top-tier FBO's
planned resolution strategy involves the covered IHC or its
subsidiaries entering into resolution, receivership, insolvency or
similar proceeding in the United States. A covered IHC is a ``non-
resolution covered IHC'' under the proposed rule if the certification
provided to the Board indicates that the top-tier FBO's planned
resolution strategy does not involve the covered IHC or its
subsidiaries entering into resolution, receivership, insolvency, or
similar proceedings in the United States.
In addition, under the proposed rule, the Board may determine in
its discretion that an entity that is certified to be a non-resolution
covered IHC is a resolution covered IHC, or that an entity that is
certified to be a resolution covered IHC is a non-resolution covered
IHC. In reviewing certifications provided with respect to covered IHCs,
the Board would expect to review all the information available to it
regarding a firm's resolution strategy, including information provided
to it by the firm. The Board would also expect to consult with the
firm's home-country resolution authority in connection with this
review. In addition, the Board may consider a number of factors
including but not limited to: (i) whether the FBO conducts substantial
U.S. activities outside of the IHC chain; (ii) whether the group's
capital and liability structure is set up in a way to allow for losses
to be upstreamed to the top-tier parent; (iii) whether the top-tier
parent or foreign affiliates provide substantial financial or other
forms of support to the U.S. operations (e.g., guarantees, contingent
claims and other exposures between group entities); (iv) whether the
covered IHC is operationally independent (e.g., costs are undertaken by
the IHC itself and whether the IHC is able to fund itself on a stand-
alone basis); (v) whether the covered IHC depends on the top-tier
parent or foreign affiliates for the provision of critical shared
services or access to infrastructure; (vi) whether the covered IHC is
dependent on the risk management or risk-mitigating hedging services
provided by the top-tier parent or foreign affiliates; and (vii) the
location where financial activity that is conducted in the United
States is booked.
A covered IHC would have one year or a longer period determined by
the Board to comply with the requirements of the proposed rule
applicable to non-resolution covered IHCs if it would become a non-
resolution covered IHC because it either changes its resolution
strategy or if the Board disagrees with the covered IHC's certification
of its resolution strategy. For example, if the Board determines that a
firm that had certified it is a resolution covered IHC is a non-
resolution covered IHC for purposes of the rule, the IHC would have up
to one year from the date on which the Board notifies the covered IHC
in writing of such determination to
[[Page 64540]]
comply with the requirements of the rule. Since under the proposed rule
a resolution covered IHC has the option to issue LTD externally to
third parties but non-resolution covered IHCs do not, the one-year
period would provide the covered IHC with time to make any necessary
adjustments to the composition of its LTD so that all of its LTD would
be issued internally.
As noted, under the proposed rule, the Board may extend the one-
year period discussed above. In acting on any requests for extensions
of this time period, the Board would consider whether the covered IHC
had made a good faith effort to comply with the requirements of the
rule.
2. Contractual Conversion Trigger
The proposed rule would require eligible internal LTD, whether
issued by resolution covered IHCs or non-resolution covered IHCs, to
contain a contractual conversion feature. The contractual trigger would
allow the Board to require the covered IHC to convert or exchange all
or some of the eligible internal LTD into common equity tier 1 capital
on a going-concern basis (that is, without the covered IHC's entry into
a resolution proceeding) under certain circumstances. These include if
the Board determines that the covered IHC is ``in default or in danger
of default'' and any of the three following additional circumstances
applies.\59\ First, the top-tier FBO or any of its subsidiaries is
placed into resolution proceedings. Second, the home country
supervisory authority consents to the exchange or conversion, or did
not object to the exchange or conversion following 24 hours' notice.
Third and finally, the Board makes a written recommendation to the
Secretary of the Treasury that the FDIC should be appointed as receiver
of the covered IHC under Title II of the Dodd-Frank Act.\60\ The terms
of the contractual conversion provision in the debt instrument would
have to be approved by the Board.\61\
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\59\ The phrase ``in default or in danger of default'' would be
defined consistently with the standard provided by section 203(c)(4)
of Title II of the Dodd-Frank Act. See 12 U.S.C. 5383(c)(4).
Consistent with section 203's definition of the phrase, a covered
IHC would be considered to be in default or in danger of default
upon a determination by the Board that (A) a case has been, or
likely will promptly be, commenced with respect to the covered IHC
under the U.S. Bankruptcy Code; (B) the covered IHC has incurred, or
is likely to incur, losses that will deplete all or substantially
all of its capital, and there is no reasonable prospect for the
company to avoid such depletion; (C) the assets of the covered IHC
are, or are likely to be, less than its obligations to creditors and
others; or (D) the covered IHC is, or is likely to be, unable to pay
its obligations (other than those subject to a bona fide dispute) in
the normal course of business.
\60\ See 12 U.S.C. 5383.
\61\ The Board has delegated authority to approve these triggers
to the General Counsel, in consultation with the Director of the
Division of Supervision and Regulation, under certain circumstances.
See 12 CFR 265.6(j).
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The principal purpose of this requirement is to ensure that losses
incurred by the covered IHC are shifted to a foreign parent without the
covered IHC having to enter a resolution proceeding. If the covered
IHC's eligible internal LTD is sufficient to recapitalize the covered
IHC in light of the losses that the covered IHC has incurred, this goal
could be achieved through conversion of the eligible internal LTD into
equity upon the occurrence of the trigger conditions.
Eligible external LTD issued by resolution covered IHCs is not
required to contain a contractual conversion trigger. The proposed rule
gives resolution covered IHCs the option to issue debt externally to
third-party investors under the proposed rule on the same terms as
covered HCs.
Question 35: The Board maintains an expectation that, following
receipt of an internal debt conversion order, the FBO parent of a
covered IHC should take steps to preserve the going concern value of
the covered IHC, consistent with the resolution strategy of the top-
tier FBO. Accordingly, the Board would expect that, following receipt
of an internal debt conversion order, a covered IHC would not make any
immediate distributions of cash or property, or make immediate payments
to repurchase, redeem, or retire, or otherwise acquire any of its
shares from its shareholders or affiliates. Should the Board codify
this expectation in the proposed rule for covered IHCs and the U.S.
IHCs of global systemically important FBOs? If so, should the
regulation text specify that any such distributions or payments are
subject to the Board's prior approval?
3. Allowance of Certain Credit-Sensitive Features
The proposed rule would not require eligible internal LTD issued by
covered IHCs to include the prohibition against including certain
credit-sensitive features that applies to other eligible LTD. This
would match the requirements for eligible internal LTD issued by U.S.
IHCs subject to the Board's TLAC rule.\62\ Internal LTD, which by
definition is issued between affiliates, is less likely to have a
credit-sensitive feature. In addition, in contrast to eligible internal
LTD of covered IDIs, eligible internal LTD of a covered IHC could be
converted to equity by the Board. The presence of the credit-sensitive
feature for the eligible LTD of a covered IHC would be less problematic
once the LTD is converted to equity.
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\62\ See 12 CFR 252.161.
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Question 36: What would be the advantages and disadvantages of
making eligible internal LTD issued by all covered IHCs subject to the
proposed rule or the TLAC rule subject to the same prohibition on
credit-sensitive features that applies to eligible external LTD?
D. Legacy External LTD Counted Towards Requirements
The agencies anticipate that some covered entities and their
subsidiary IDIs, as well as potentially certain other covered IDIs,
will have external LTD outstanding at the time of finalization of the
proposed rule. To enable covered entities and covered IDIs to most
readily and effectively meet minimum LTD requirements as the proposed
requirements are phased in, the proposed rule would allow some of this
legacy external LTD to count toward the minimum requirements in the
proposed rule, even where such legacy external LTD does not meet
certain eligibility requirements. Specifically, the proposal would
provide an exception for the following categories of outstanding
external LTD instruments issued by covered HCs, resolution covered
IHCs, and their subsidiary IDIs, and permitted and required externally
issuing IDIs, that do not conform to all of the eligibility
requirements that will apply to issuances of eligible internal or
external LTD going forward once notice of the final rule resulting from
this proposal is published in the Federal Register: (i) instruments
that contain otherwise impermissible acceleration clauses, (ii)
instruments issued with principal denominations that are less than the
proposed $400,000 minimum amount, and (iii) in the case of legacy
instruments issued externally by a covered IDI, are not contractually
subordinated to general unsecured creditors (collectively, eligible
legacy external LTD). In addition, eligible legacy external LTD issued
by a consolidated subsidiary IDI of a covered entity may be used to
satisfy the minimum external LTD requirement applicable to its parent
covered HC or resolution covered IHC, as well as any internal LTD
requirement applicable to the subsidiary IDI itself. Eligible legacy
external LTD cannot be used to satisfy the internal LTD requirement for
nonresolution covered IHCs. To qualify as eligible legacy external LTD,
an instrument must have been issued prior
[[Page 64541]]
to the date that notice of the final rule resulting from this proposal
is published in the Federal Register.
The allowance for eligible legacy external LTD would reduce the
costs of modifying the terms of existing outstanding debt or issuing
new debt to meet applicable minimum LTD requirements. Over time, debt
that is subject to the legacy exception will mature and be replaced by
LTD that must meet all of the proposal's eligibility requirements. This
approach is consistent with the intent of the legacy exceptions that
were made available to entities subject to the TLAC rule in relation to
LTD instruments issued prior to December 31, 2016.\63\
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\63\ See 12 CFR 252.61 ``Eligible debt security.''
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As noted above, the proposal would authorize the agencies, after
providing a covered entity or covered IDI with notice and an
opportunity to respond, to order the covered entity or covered IDI to
exclude from its outstanding eligible LTD amount any otherwise eligible
debt securities. These provisions would also apply to eligible legacy
external LTD.
Question 37: What are the advantages and disadvantages of creating
this exception for certain outstanding legacy external LTD issued by
covered entities for purposes of the proposed rule?
Question 38: What are the advantages and disadvantages of
establishing the date that notice of the final rule resulting from this
proposal is published in the Federal Register as the date before which
external LTD must have been issued to qualify as legacy external LTD,
as opposed to the date that the rule becomes effective?
Question 39: The agencies welcome quantitative information about
outstanding LTD issuances by covered entities or covered IDIs. What
amount of LTD do covered entities or covered IDIs have outstanding?
What amount would qualify as LTD if all the requirements applied upon
finalization of the rule? What amount would qualify as LTD under the
proposed exception?
VI. Clean Holding Company Requirements
To promote the resiliency of covered entities and minimize the
knock-on effects of the failure of a covered entity to its
counterparties and the financial system, the Board proposes to impose
``clean holding company'' requirements on covered entities. These
requirements are similar to those imposed on U.S. GSIBs and U.S. IHCs
subject to the TLAC rule.\64\ Specifically, the proposal would prohibit
covered entities from having the following categories of outstanding
liabilities: third-party debt instruments with an original maturity of
less than one year (short-term debt); QFCs with a third party (third-
party QFCs); guarantees of a subsidiary's liabilities if the covered
entity's insolvency or entry into a resolution proceeding (other than
resolution under Title II of the Dodd-Frank Act) would create default
rights for a counterparty of the subsidiary (subsidiary guarantees with
cross-default rights); and liabilities that are guaranteed by a
subsidiary of the covered entity (upstream guarantees) or that are
subject to rights that would allow a third party to offset its debt to
a subsidiary upon the covered entity's default on an obligation owed to
the third party. Additionally, the proposal would limit the total value
of a covered entity's (i.e., parent-only, on an unconsolidated basis)
non-eligible LTD liabilities owed to nonaffiliates that would rank at
either the same priority as or junior relative to eligible LTD to 5
percent of the value of the covered entity's common equity tier 1
capital (excluding common equity tier 1 minority interest), additional
tier 1 capital (excluding tier 1 minority interest), and eligible LTD
amount. The proposed prohibitions and cap would apply only to the
corporate practices and liabilities of the covered entity itself. They
would not directly restrict the corporate practices and liabilities of
the subsidiaries of the covered entity.
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\64\ See 12 CFR 252.64 and .166.
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As discussed further below, these provisions provide benefits
independent of the resolution strategy of a covered entity, including
by improving the resiliency of covered entities, limiting certain
transactions that can give rise to financial stability risks before a
covered entity fails, and simplifying a covered entity so that it and
its relevant subsidiaries can be resolved in a prompt and orderly
manner.
These provisions may also advance several goals in connection with
the resolution of the covered entity. In the case of SPOE resolution,
these provisions support the goal of that resolution strategy to
achieve the rapid recapitalization of the material subsidiaries of a
covered entity with minimal interruption to the ordinary operations of
those subsidiaries. The proposed clean holding company restrictions
would advance this goal by prohibiting transactions that would
distribute losses that should be borne solely by a covered entity to
the covered entity's subsidiaries.
In the case of an MPOE resolution, in which a covered entity and
its subsidiary IDI would enter into resolution, these provisions would
limit the extent to which a subsidiary of a covered entity would
experience losses or disruptions in its operations as a result of the
failure of the covered entity prior to and during resolution. In
particular, the prohibition on covered entity liabilities that are
subject to upstream guarantees or offset rights would prevent a failed
covered entity's creditors from passing their losses on to the covered
entity's subsidiaries. Furthermore, covered entities that currently
plan for an MPOE resolution strategy may nevertheless be resolved
pursuant to an SPOE resolution strategy or adopt an SPOE resolution
strategy in the future. Applying the clean holding company requirements
to covered entities that currently plan for an MPOE resolution ensures
that the benefits of these requirements that may be more significant
for covered entities with an SPOE resolution strategy are readily
available to covered entities with an MPOE resolution strategy that
ultimately are resolved with an SPOE resolution strategy or eventually
change their resolution strategy to an SPOE strategy.
Question 40: What would be the advantages and disadvantages of
imposing clean holding company requirements on covered entities? What
would be the costs or consequences on business practices of imposing
these requirements?
Question 41: Under the existing TLAC rule, U.S. IHCs of foreign
GSIBs already comply with clean holding company requirements. What
characteristics about U.S. IHCs that would be subject to the proposed
rule (i.e., not subject to the existing TLAC rule), if any, would make
it appropriate or inappropriate to apply such requirements?
Question 42: To what extent are the clean holding company
requirements appropriate for a firm that employs an MPOE resolution
strategy? What specific challenges, if any, would result from applying
the clean holding company requirements to these firms?
Question 43: What changes, if any, would result to an IDI's
business model if its parent company is a covered entity that becomes
subject to the clean holding company requirements, where the covered
entity proposes an MPOE resolution strategy?
A. No External Issuance of Short-Term Debt Instruments
The proposed rule would prohibit covered entities from externally
issuing debt instruments with an original maturity of less than one
year. Under the proposed rule, a liability has an original maturity of
less than one year if it would provide the creditor with the option to
receive repayment within one
[[Page 64542]]
year of the creation of the liability, or if it would create such an
option or an automatic obligation to pay upon the occurrence of an
event that could occur within one year of the creation of the liability
(other than an event related to the covered entity's insolvency or a
default related to failure to pay that could trigger an acceleration
clause).
The prohibition on external issuance of short-term debt instruments
would improve the resiliency of covered entities and their subsidiaries
and help mitigate the financial stability risks presented by
destabilizing funding runs. A covered entity with significant short-
term obligations is less resilient because, in the event of real or
perceived stress, short-term creditors can refuse to roll over their
loans to the covered entity. In that case, the covered entity must
either find replacement funding or sell assets in order to pay its
short-term creditors. Both of these outcomes normally would weaken the
covered entity because replacement funding is likely to be at a premium
and the assets would likely be sold at a loss in order to quickly
generate cash. In response to the termination or curtailment of a
covered entity's short-term funding or the covered entity's asset
sales, counterparties or customers of the covered entity's subsidiaries
may also lose confidence in those subsidiaries and unwind transactions
with or withdraw funding from them. This issue may be acute for IDIs
because their main creditors--depositors--generally have the ability to
demand their funds on short notice. Prohibiting external issuance of
short-term debt instruments by covered entities decreases the
likelihood of these outcomes, improving the resiliency of a covered
entity and its subsidiaries. For example, a covered entity is better
able to serve as a source of managerial and financial strength to its
subsidiary IDI if the covered entity is not experiencing a run on its
short-term liabilities.
Decreasing the likelihood of a funding run also benefits financial
stability. The sale of assets by a covered entity to repay its short-
term creditors can be a key channel for the propagation of stress
through the financial system. If those assets are widely held by other
firms, then the sale by a covered entity of those assets can depress
the fair value of those assets, thereby significantly affecting other
firms' balance sheets, which could precipitate stress at those
institutions, which could require further asset sales. The proposed
rule would help mitigate these financial stability risks by prohibiting
covered entities from relying on short-term funding and reducing run
risk.
The prohibition against short-term funding in the proposed rule
applies to both secured and unsecured short-term borrowings. Although
secured creditors are less likely to take losses in resolution than
unsecured creditors, secured creditors may nonetheless be unwilling to
maintain their exposure to a covered entity that comes under stress in
order to avoid potential disruptions in access to the collateral during
resolution proceedings.
Question 44: What are the advantages and disadvantages to the
proposed prohibition on external issuance by covered entities of short-
term debt instruments? To what extent do covered entities that would be
subject to the proposed rule rely on liabilities that would be subject
to this prohibition?
B. Qualified Financial Contracts With Third Parties
Under the proposal, covered HCs would be permitted to enter into
QFCs only with their subsidiaries and covered IHCs would be permitted
to enter into QFCs only with their affiliates, with the exception
described below of entry into certain credit enhancement arrangements
with respect to QFCs between a covered entity's subsidiary and third
parties. The proposal defines QFCs by reference to Title II of the
Dodd-Frank Act, which defines QFCs to include securities contracts,
commodities contracts, forward contracts, repurchase agreements, and
swap agreements, consistent with the TLAC rule.\65\
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\65\ 12 U.S.C. 5390(c)(8)(D).
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The failure of a large banking organization that is a party to a
material amount of third-party QFCs could pose a substantial risk to
the stability of the financial system. Specifically, it is likely that
many of that institution's QFC counterparties would respond to the
institution's default by immediately liquidating their collateral and
seeking replacement trades with third-party dealers, which could cause
fire sale effects and propagate financial stress to other firms that
hold similar assets by depressing asset prices. The proposed
restriction on third-party QFCs would mitigate this threat to financial
stability for covered entities under both MPOE and SPOE strategies. In
the case of a successful SPOE resolution, covered entities' operating
subsidiaries, which may be parties to large quantities of QFCs, should
remain solvent and not fail to meet any ordinary course payment or
delivery obligations. Therefore, assuming that the cross-default
provisions of the QFCs engaged in by the operating subsidiaries of
covered entities are appropriately structured, their QFC counterparties
generally would have no contractual right to terminate or liquidate
collateral on the basis of the covered entity's entry into resolution
proceedings. The proposed restrictions also would support successful
MPOE resolution as they would encourage covered entities to migrate any
external QFC activity currently being conducted at the covered entity
level to the relevant operating subsidiaries, a structure that would be
better aligned with the activities of the underlying subsidiaries and
will enable, in the case of IDI subsidiaries, the direct application of
statutory QFC stay provisions provided under the FDI Act with regard to
such QFCs. This migration of covered entity QFCs to the subsidiary
level should simplify resolution proceedings and enable continuity of
necessary QFC activities in resolution. Further, a covered entity
itself would have, subject to the exceptions discussed below, no
further QFCs with external counterparties, if any, and so the covered
entity's entry into resolution proceedings could result in limited or
no direct defaults on QFCs and related fire sales, assuming the covered
entity complies with the cross-default and upstream guarantee
restrictions discussed below. The proposed restriction on third-party
QFCs would therefore materially diminish the fire sale risk and
contagion effects associated with the failure of a covered entity.
The proposal would only apply prospectively to new agreements
entered into after the post-transition period effective date of a final
rule. The proposed rule would also exempt certain contracts from the
prohibition on third-party QFCs for covered HCs. These exemptions,
which are also are being proposed for U.S. GSIBs and U.S. IHCs of
foreign GSIBs, are discussed further below and would apply to certain
underwriting agreements, fully paid structured share repurchase
agreements, and employee and director compensation agreements.
Question 45: What are the advantages and disadvantages to the
proposed prohibition on third-party QFCs? To what extent do covered
entities that would be subject to the proposed rule currently enter
into QFCs?
Question 46: What would be the cost or consequences on business
practices of imposing a prohibition on third-party QFCs?
[[Page 64543]]
C. Guarantees That Are Subject to Cross-Defaults
The proposal would prohibit a covered entity from guaranteeing
(including by providing credit support for) any liability between a
direct or indirect subsidiary of the covered entity and an external
counterparty if the covered entity's insolvency or entry into
resolution (other than resolution under Title II of the Dodd-Frank Act)
would directly or indirectly provide the subsidiary's counterparty with
a default right. The proposal defines the term ``default right''
broadly. Guarantees by covered entities of subsidiary liabilities, in
the case of covered HCs, and of affiliates, in the case of covered
IHCs, that are not subject to such cross-default rights would be
unaffected by the proposal. The proposal would only apply prospectively
to new agreements established after the effective date of a final rule.
This proposal would improve the resolvability and resilience of
covered entities that have adopted MPOE and SPOE strategies. The
proposed requirements would support the ability of a covered entity's
subsidiaries to continue to operate normally or undergo an orderly
wind-down upon the covered entity's entry into resolution. For example,
an obstacle to resolution would occur if a covered entity's entry into
resolution or insolvency operated as a default by the subsidiary and
empowered the subsidiary's counterparties to take default-related
actions, such as ceasing to perform under the contract or liquidating
collateral. Were subsidiary QFC counterparties to take such actions,
the subsidiary could face liquidity, reputational, or other stress that
could undermine its ability to continue operating normally, including
by placing short-term funding strain on the subsidiary. This could have
destabilizing effects, even for a subsidiary of a covered entity with
an MPOE resolution strategy as it could erode the franchise or market
value of the subsidiary and pose obstacles to its orderly resolution or
wind-down. The proposed prohibition would also complement other work
that has been done to facilitate GSIB resolution through the stay of
cross-defaults, including the agencies' final rule imposing
restrictions on QFCs and the ISDA Protocol.\66\
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\66\ See 12 CFR part 47 (OCC); 12 CFR 252 subpart I (Board); 12
CFR part 382 (FDIC); ISDA Universal Resolution Stay Protocol (Nov.
12, 2015), <a href="https://www.isda.org/protocol/isda-2015-universal-resolution-stay-protocol">https://www.isda.org/protocol/isda-2015-universal-resolution-stay-protocol</a>; ISDA 2018 U.S. Resolution Stay Protocol
(Aug. 22, 2018), <a href="https://www.isda.org/protocol/isda-2018-us-resolution-stay-protocol">https://www.isda.org/protocol/isda-2018-us-resolution-stay-protocol</a>.
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The prohibition on entry by covered entities into guarantee
arrangements covering subsidiary liabilities that contain cross-default
rights would exempt guarantees subject to a rule of the Board
restricting such cross-default rights or any similar rule of another
U.S. Federal banking agency.\67\ For example, the proposal would exempt
from this prohibition subsidiary guarantees with cross-default rights
that would be stayed if the underlying contracts were subject to the
Board, OCC, or FDIC's rules requiring stays of QFC default rights in
certain resolution scenarios.\68\ However, these rules currently do not
apply to covered entities. Although the Board has not adopted a rule
regarding cross-default provisions of financial contracts that would
apply to covered entities, the proposal leaves open the possibility
that in the future certain guarantees would be permitted to the extent
they are authorized under a rule of the Board or another Federal
banking agency.
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\67\ Liabilities would be considered ``subject to'' such a rule
even if those liabilities were exempted from one or more of the
requirements of the rule.
\68\ See, e.g., 12 CFR part 47 (OCC); 12 CFR 252 subpart I
(Board); 12 CFR part 382 (FDIC).
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Question 47: Would modifications to the scope of the agencies'
existing QFC stay rules be necessary to support the implementation of
this provision? What are the advantages and disadvantages of doing so?
Should such a rulemaking permit certain guarantee arrangements to
contain cross-default provisions, consistent with 12 CFR 252 subpart I?
D. Upstream Guarantees and Offset Rights
The proposed rule would prohibit covered entities from having
outstanding liabilities that are subject to a guarantee from any direct
or indirect subsidiary of the holding company (upstream guarantees).
Both MPOE and SPOE resolution strategies are premised on the assumption
that a covered entity's operating subsidiaries face no claims from the
creditors of the holding company as those subsidiaries either continue
to operate normally or undergo separate resolution proceedings. This
arrangement could be undermined if a liability of the covered entity is
subject to an upstream guarantee because the effect of such a guarantee
is to expose the guaranteeing subsidiary (and, ultimately, its
creditors) to the losses that would otherwise be imposed on the holding
company's creditors. A prohibition on upstream guarantees would
facilitate both MPOE and SPOE resolution strategies by increasing the
certainty that the covered entity's eligible external LTD holders will
be exposed to loss separately from the creditors of a covered entity's
subsidiaries.
Upstream guarantees do not appear to be common among covered
entities. Section 23A of the Federal Reserve Act already limits the
ability of an IDI to issue guarantees on behalf of its parent holding
company.\69\ The principal effect of the prohibition would therefore be
to prevent the future issuance of such guarantees by material non-bank
subsidiaries.
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\69\ Transactions subject to the quantitative limits of section
23A of the Federal Reserve Act and Regulation W include guarantees
issued by a bank on behalf of an affiliate. See 12 U.S.C.
371c(b)(7)(E); 12 CFR 223.3(h)(5).
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Similarly, the proposed rule prohibits covered entities from
issuing an instrument if the holder of the instrument has a contractual
right to offset the holder's liabilities, or the liabilities of an
affiliate of the holder, to any of the covered entity's subsidiaries
against the covered entity's liability under the instrument. The
prohibition includes all such offset rights regardless of whether the
right is provided in the instrument itself. Such offset rights are
another device by which losses that are expected to flow to the covered
entity's external LTD holders in resolution could instead be imposed on
operating subsidiaries and their creditors.
E. Cap on Certain Liabilities
For covered HCs, the proposed rule would limit the amount of non-
contingent liabilities to third parties (i.e., persons that are not
affiliates of the covered entity) that are not eligible LTD, common
equity tier 1 capital, or additional tier 1 capital and that would rank
at either the same priority as or junior to the covered entity's
eligible LTD in the priority scheme of either the U.S. Bankruptcy Code
or Title II of the Dodd-Frank Act to no more than 5 percent of the sum
of a covered HC's common equity tier 1 capital (excluding common equity
tier 1 minority interest), additional tier 1 capital (excluding tier 1
minority interest), and eligible LTD amount.\70\ The cap would not
apply to instruments that were eligible external LTD when issued and
have ceased to be eligible (because their remaining maturity is less
than one year) as long as the holder of the instrument does not have a
currently exercisable put right; nor would it apply to payables (such
as dividend- or interest-related payables) that are associated with
such liabilities (related liabilities). Liabilities that would be
expected to be subject to the cap include debt instruments with
derivative-linked features (i.e., structured notes); external vendor
and
[[Page 64544]]
operating liabilities, such as for utilities, rent, fees for services,
and obligations to employees; and liabilities arising other than
through a contract (e.g., liabilities created by a court judgment)
(collectively, unrelated liabilities).
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\70\ See 11 U.S.C. 507; 12 U.S.C. 5390(b).
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The purpose of this requirement is to limit the amount of
liabilities that are not common equity tier 1 capital, additional tier
1 capital, or eligible LTD that would rank at either the same priority
as or junior relative to eligible LTD in a bankruptcy or resolution
proceeding. This ensures that eligible LTD absorbs losses prior to
almost all other liabilities of the covered entity and mitigates the
legal risk that non-LTD creditors of a failed covered entity object to
or otherwise complicate the imposition of losses in bankruptcy on the
class of creditors that includes the eligible LTD of the covered
entity. As a practical matter, the cap also would result in a
significant portion of a covered entity's unsecured liabilities being
composed of eligible LTD, which is preferable because eligible LTD has
the features discussed above that more readily absorb loss and
facilitate a simpler resolution relative to other types of unsecured
debt.
The proposal would not subject a covered entity to this cap if the
covered entity elects to subordinate all of its eligible LTD to all of
the covered entity's other liabilities. Subordinating all of a covered
entity's eligible LTD also would address the risk that non-LTD
creditors might object to or otherwise complicate imposing losses on
investors in eligible LTD. Permitting covered entities a choice between
adhering to the cap on unrelated liabilities or instead contractually
subordinating all eligible LTD to all of the covered entity's other
liabilities provides greater flexibility in choosing how to comply with
the proposed rule.
The proposed calibration of 5 percent is consistent with the 5
percent calibration for the similar cap on unrelated liabilities that
applies to the parent holding companies of U.S. GSIBs and U.S. IHCs of
foreign GSIBs.\71\ Like the cap for U.S. GSIBs and the U.S. IHCs of
foreign GSIBs, the proposed cap for a covered entity would be specified
as a percentage of the sum of the covered entity's common equity tier 1
capital, additional tier 1 capital, and eligible LTD amount. The
proposed 5 percent cap would apply to the parent-only balance sheets of
covered entities. Specifically, Board staff estimates that, on average,
the amount of liabilities that would be subject to this cap as a
percentage of the sum of a firm's tier 1 capital and minimum LTD
requirement under the proposal would be less than the proposed 5
percent cap.\72\
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\71\ See 12 CFR 252.64(b)(1) (cap on unrelated liabilities for
U.S. GSIBs); 12 CFR 252.166(b)(1) (cap on unrelated liabilities for
U.S. IHCs of foreign GSIBs).
\72\ Estimated to be approximately 4.6 percent. Calculated by
dividing the average of the numerator and denominator for covered
HCs and covered IHCs. The liabilities included in the numerator for
this calculation are reported, as of December 31, 2022, as line
items 13 and 17 from the FR Y-9LP. The tier 1 capital and total
consolidated asset amount used to estimate the minimum LTD
requirement for the denominator are from line items HC-R.26 and HC-
R.46.a of the FR Y-9C, respectively.
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Under the proposed rule, the set of liabilities that would count
towards the unrelated liabilities cap for a resolution covered IHC
would be different than the liabilities that would count towards the
cap for non-resolution covered IHCs (discussed below) because
resolution covered IHCs are permitted to issue eligible LTD externally
to third parties. The cap for resolution covered IHCs applies to
unrelated liabilities owed to parent and sister affiliates, as well as
to unaffiliated third parties, because these IHCs have the option to
issue external LTD that will be expected to bear losses in the
resolution covered IHC's individual resolution proceeding and that may
rank at either the same priority as or senior to such unrelated
liabilities. Thus, these firms may owe significant amounts of unrelated
liabilities to their FBO parents or another affiliate that would remain
outstanding when the IHC enters resolution, because such entities are
not anticipated to support the IHC under the resolution plan of the
parent FBO.\73\ The cap on unrelated liabilities owed to parents and
sister affiliates limits the amount of these liabilities that would be
outstanding at the time that a resolution covered IHC enters into
resolution.
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\73\ This inclusion of liabilities owed to parents of the
resolution covered IHC also aligns with the cap on liabilities of
covered HCs, which would include liabilities held by shareholders of
the covered HC.
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The cap on unrelated liabilities for non-resolution covered IHCs
does not include liabilities owed to foreign affiliates because for
such entities, the eligible LTD held by foreign affiliates should, in a
resolution scenario, convert to equity of the covered IHC, either
through actions of the parent or the Board. Therefore, in contrast to
resolution covered IHCs, concern about liabilities owed to the FBO
parent or other affiliated parties is minimal.
Question 48: What would be the advantages and disadvantages of the
proposed cap on unrelated liabilities? Could the objectives of the cap
be achieved through other means? For example, instead of imposing a cap
on unrelated liabilities, should the Board require that the LTD
required under this rule be contractually subordinated so that it
represents the most subordinated debt claim in receivership,
insolvency, or similar proceedings? Would a different threshold for the
cap be more appropriate for covered HCs or covered IHCs? For example,
should the cap be calibrated to be modestly higher than the cap for
U.S. GSIBs and the U.S. IHCs of foreign GSIBs because GSIBs are
required to maintain outstanding a greater percentage of equity
capital?
Question 49: What are the advantages and disadvantages of the
proposed calibration of 5 percent of the sum of common equity tier 1
capital, additional tier 1 capital, and eligible LTD amount? Would an
alternative value in the range of 4 percent to 15 percent be more
appropriate? If so, why?
VII. Deduction of Investments in Eligible External LTD From Regulatory
Capital
In 2021, the agencies adopted an amendment to the capital rule that
required U.S. GSIBs, their subsidiary depository institutions, and
Category II banking organizations to make certain deductions from
regulatory capital for investments in LTD issued by U.S. GSIBs under
the Board's TLAC rule to meet the minimum TLAC requirements.\74\ Among
other requirements, under the current capital rule a U.S. GSIB, U.S.
GSIB subsidiary, or Category II banking organization is required to
deduct investments in LTD issued by banking organizations that are
required to issue LTD to the extent that aggregate investments by the
investing U.S. GSIB, U.S. GSIB subsidiary, or Category II banking
organization in the capital and LTD of other financial institutions
exceed a specified threshold of the investing banking organization's
regulatory capital. For purposes of the threshold deduction, U.S.
GSIBs, U.S. GSIB subsidiaries, and Category II banking organizations
are permitted to exclude a limited amount of LTD
[[Page 64545]]
investments, with U.S. GSIBs and U.S. GSIB subsidiaries only permitted
to exclude LTD investments held for market making purposes. The
deduction framework in the current capital rule is intended to reduce
interconnectedness and contagion risk by discouraging U.S. GSIBs, U.S.
GSIB subsidiaries, and Category II banking organizations from investing
in the capital of other financial institutions and in the LTD issued by
banking organizations that are required to issue LTD.
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\74\ In addition to LTD issued by U.S. GSIBs under the Board's
TLAC rule, the 2021 amendments to the capital rule covered LTD
issued by foreign global systemically important banking
organizations and their U.S. IHCs. See Regulatory Capital Treatment
for Investments in Certain Unsecured Debt Instruments of Global
Systemically Important U.S. Bank Holding Companies, Certain
Intermediate Holding companies, and Global Systemically Important
Foreign Banking Organizations; Total Loss-Absorbing Capacity
Requirements, 86 FR 708 (Jan. 6, 2021). This rule also provided for
deduction of debt instruments that are ranked at either the same
priority as or subordinated to LTD instruments and debt instruments
issued by global systemically important FBOs under foreign standards
similar to the Board's TLAC rule.
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Distress at a covered entity or IDI that issues externally, and the
associated write-down or conversion into equity of its eligible LTD,
could have a direct negative impact on the capital of investing banking
organizations, potentially at a time when such banking organizations
may themselves be experiencing financial stress. Requiring that U.S.
GSIBs, U.S. GSIB subsidiaries, and Category II banking organizations
apply the deduction framework to the LTD of a covered entity or IDI
that issues externally would discourage these banking organizations
from investing in such instruments, and would thereby help to reduce
both interconnectedness within the financial system and systemic risk.
Therefore, the proposal would expand the current deduction framework in
the capital rule for U.S. GSIBs, U.S. GSIB subsidiaries, and Category
II banking organizations to also apply to eligible external LTD issued
by covered entities and mandatory or permitted externally issuing IDIs
to meet the minimum LTD requirement set forth in this proposal by
amending the capital rule's definition of covered debt instrument. The
expanded deduction framework would apply to all legacy external LTD,
including externally issued LTD of an internally issuing IDI that was
issued prior to the date that the notice of the final rule resulting
from this proposal is published in the Federal Register. The proposal
would not itself otherwise amend the capital rule's deduction
framework. Notably, however, the recently released Basel III reforms
proposal \75\ would subject Category III and IV banking organizations
to the LTD deduction framework that currently only applies to U.S.
GSIBs, U.S. GSIB subsidiaries, and Category II banking organizations
and would apply a heightened risk weight to investments in LTD that are
not deducted. Thus, if both this proposal and the Basel III reforms
proposal are adopted as proposed, Category III and IV banking
organizations will newly become subject to the capital rule's deduction
framework for investments in LTD and the deduction framework would be
expanded to apply to eligible LTD issued by covered entities and
mandatory and permitted externally issuing IDIs.
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\75\ On July 27, 2023, the agencies issued a proposal to amend
the capital requirements for banking organizations with total assets
of $100 billion or more and their subsidiary depository institutions
(i.e., banking organizations subject to category I-IV standards),
and to banking organizations with significant trading activity
(Basel III reforms proposal). See Joint press release: Agencies
request comment on proposed rules to strengthen capital requirements
for large banks (July 27, 2023), <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230727a.htm">https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230727a.htm</a>.
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Question 50: What are the advantages and disadvantages of expanding
the deduction framework to apply to eligible external LTD issued to
satisfy the LTD requirements set forth in the proposal? To what extent
would the proposed deduction from regulatory capital of investments in
eligible external LTD restrict the ability of external issuers to issue
eligible external LTD?
Question 51: What would be the advantages or disadvantages of an
alternative approach of requiring the deduction of eligible external
LTD of only certain external issuers? For example, should eligible LTD
of only larger firms within Categories I-IV be subject to the deduction
framework? Should eligible external LTD issued by IDIs that are covered
IDIs solely due to their affiliation with another covered IDI not be
subject to the deduction framework? What considerations should affect
whether an external issuer's eligible external LTD should be subject to
the deduction framework?
Question 52: What would be the advantages and disadvantages of
amending the proposed application of the deduction framework to exclude
from deduction eligible legacy external LTD?
VIII. Transition Periods
The agencies propose to provide a transition period for covered
entities and covered IDIs that would be subject to the rule when it is
finalized, and a transition period for covered entities and covered
IDIs that become subject to the rule after it is finalized. The purpose
of these proposed transition periods is to minimize the effect of the
implementation of the proposal on covered entities and covered IDIs, as
well as on credit availability and credit costs in the U.S. economy.
The agencies propose to provide covered entities and covered IDIs
three years to achieve compliance with the final rule. The three-year
transition period would be the same for all covered IDIs, regardless of
whether a covered IDI is required to issue internally to a parent or
externally. Three years would provide covered entities and covered IDIs
adequate time to make necessary arrangements to comply with the final
rule without creating undue burden that would have unreasonable adverse
impacts for covered entities and covered IDIs. The agencies may
accelerate or extend this transition period in writing for the covered
IDIs for which they are the appropriate Federal banking agency, and the
Board may accelerate or extend this transition period in writing for
covered entities.
Over that three-year period, covered entities and covered IDIs
would need to meet 25 percent of their LTD requirements by one year
after finalization of the rule, 50 percent after two years of
finalization, and 100 percent after three years. This required phase-in
schedule would apply to covered entities and covered IDIs that are
subject to the rule beginning on the effective date of the finalized
rule, and would likewise apply upon a firm becoming subject to the rule
sometime after finalization. The proposed rule would provide additional
clarifications regarding the three-year transition period to prevent
evasion of the rule. The three-year transition period would not restart
for a covered IDI that changes charters. For example, a national bank
subject to the OCC's proposed rule would not have an additional three
years to transition into compliance with the FDIC's proposed rule if
the national bank changes its charter to a state-chartered savings
association. Likewise, the holding company of such a bank would not
have an additional three years to transition to the Board's rule for
SLHCs. Covered entities that transition from being subject to the
proposed LTD requirement to the requirements applicable to U.S. GSIBs
or U.S. IHCs controlled by foreign GSIBs that are codified in the
Board's existing TLAC rule would have three years to comply with those
requirements. However, during that three-year period, such entities
would be required to continue to comply with the LTD requirement and
other requirements of the proposed rule. That is, a covered entity that
is subject to the proposed rule and then becomes subject to the TLAC
rule must continue to satisfy the minimum LTD and other requirements of
the proposed rule during the three-year transition period for the TLAC
rule. During this transition period, the covered entity would be
required to issue new eligible LTD if necessary to maintain the minimum
eligible LTD requirement set forth in the proposed rule.
[[Page 64546]]
Question 53: Is three years an appropriate amount of time for firms
that become subject to the proposed rule immediately upon finalization
and those that become subject after the date on which the rule is
finalized to transition into full compliance? Would a shorter period,
such as two years, be an adequate transition period? If so, should a
shorter transition period also include a phase-in of 50 percent of the
LTD requirement by year one and 100 percent by year two? Alternatively,
would a longer period, such as four years, be appropriate?
Question 54: Should the agencies consider a longer transition
specifically for Category IV covered entities and their covered IDI
subsidiaries, which may have less existing LTD than larger covered
entities and covered IDIs? For example, should these companies have
four years to transition to the proposed requirements?
Question 55: During the three-year period proposed by the agencies,
what would be the advantages and disadvantages of requiring covered
entities and covered IDIs to submit an implementation plan for
complying with the proposed requirements at the end of the three-year
period rather than or in addition to satisfying the specified phased in
percentages of the LTD requirement on the timeline proposed?
Question 56: Should the agencies consider requiring a different
phase in, or a phase in that requires partial compliance at a different
date? For example, should the agencies consider a phase in that
requires covered entities and covered IDIs to meet 30 percent of their
LTD requirement by year one, 60 percent by year two, and 100 percent by
year three? What factors should the agencies consider in determining
the appropriateness of a phase in requirement (for example, how should
the agencies account for the fact that some covered entities already
have existing LTD instruments that would be eligible LTD) or in
structuring the phase-in requirement?
Question 57: If the agencies revise the proposed transition period
to be less than three years or retain the phase-in requirement, should
the Board amend the requirements in the existing TLAC rule for U. S.
GSIBs and U.S. IHCs of global systemically important FBOs to include
the same transition periods or phase-in requirement? \76\
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\76\ Under the TLAC rule, U.S. GSIBs and U.S. IHCs of global
systemically important FBOs have three years from when they meet the
scope of application requirements for that rule. See 12 CFR
252.60(b)(2) and .160(b)(2).
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IX. Changes to the Board's TLAC Rule
In 2017, the Board finalized a TLAC and LTD requirement for the
top-tier parent holding companies of domestic U.S. GSIBs (TLAC HCs) and
IHCs of foreign GSIBs (TLAC IHCs and, together with TLAC HCs, ``TLAC
companies'') to improve the resiliency and resolvability of TLAC
companies and thereby reduce threats to financial stability.\77\ The
TLAC rule is intended to improve the resolvability of GSIBs without
extraordinary government support or taxpayer assistance by establishing
``total loss-absorbing capacity'' standards for the GSIBs and requiring
them to issue a minimum amount of LTD. The TLAC rule requires TLAC
companies to maintain outstanding minimum levels of TLAC and eligible
LTD; \78\ establishes a buffer on top of both the risk-weighted asset
and leverage components of the TLAC requirements, the breach of which
would result in limitations on a TLAC company's capital distributions
and discretionary bonus payments; \79\ and applies ``clean holding
company'' limitations to TLAC companies to further improve their
resolvability and the resiliency of their operating subsidiaries.\80\
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\77\ Total Loss-Absorbing Capacity, Long-Term Debt, and Clean
Holding Company Requirements for Systemically Important U.S. Bank
Holding Companies and Intermediate Holding Companies of Systemically
Important FBOs, 82 FR 8266 (Jan. 24, 2017), <a href="https://www.federalregister.gov/documents/2017/01/24/2017-00431/total-loss-absorbing-capacity-long-term-debt-and-clean-holding-company-requirements-for-systemically#citation-102-p8300">https://www.federalregister.gov/documents/2017/01/24/2017-00431/total-loss-absorbing-capacity-long-term-debt-and-clean-holding-company-requirements-for-systemically#citation-102-p8300</a>.
\78\ 12 CFR part 252, subparts G and P.
\79\ 12 CFR 252.63(c) and .165(d).
\80\ 12 CFR 252.64 and .166.
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Since adopting the TLAC rule in 2017, the Board has gained
experience administering the rule, including by responding to questions
from TLAC companies and monitoring compliance by TLAC companies with
the rule. In light of that experience, the Board is proposing to make
several amendments to the TLAC rule, as discussed in greater detail
below. These amendments generally are technical or intended to improve
harmony between provisions within the TLAC rule and address items that
have been identified through the Board's administration of the TLAC
rule.
A. Haircut for LTD Used To Meet TLAC Requirement
The TLAC rule requires TLAC companies to maintain a minimum amount
of TLAC and a minimum amount of eligible LTD.\81\ Eligible LTD
generally can be used to satisfy both these requirements. However,
eligible LTD must have minimum maturities to count towards the
requirements, and the minimum maturity required to count towards each
requirement is different. For both the TLAC and LTD requirements, 100
percent of the amount of eligible LTD that is due to be paid in two or
more years counts towards the requirements, and zero percent of the
amount of eligible LTD that is due to be paid within one year counts
towards the requirements. However, while 100 percent of the amount of
eligible LTD that is due to be paid in one year or more but less than
two years counts towards the TLAC requirement, only 50 percent of the
amount counts towards the LTD requirement.\82\
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\81\ See 12 CFR 252.62-.62, .162, and .165.
\82\ Compare 12 CFR 252.62(b)(1)(ii) and .162(b)(1)(ii) with 12
CFR 252.63(b)(3), .165(c)(1)(iii), and .165(c)(2)(iii).
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When it adopted the TLAC rule, the Board stated that the purpose of
the 50 percent haircut applied for purposes of the LTD requirement with
respect to the amount of eligible LTD that is due to be paid between
one and two years is to protect a TLAC company's LTD loss-absorbing
capacity against a run-off period in excess of one year (as might occur
during a financial crisis or other protracted stress period) in two
ways. First, the 50 percent haircut requires TLAC companies that rely
on eligible LTD that is vulnerable to such a run-off period (because it
is due to be paid in less than two years) to maintain additional LTD
loss-absorbing capacity. Second, it incentivizes TLAC companies to
reduce or eliminate their reliance on LTD loss-absorbing capacity that
is due to be paid in less than two years, since by doing so they avoid
being required to issue additional eligible LTD in order to account for
the haircut. A TLAC company could reduce its reliance on eligible LTD
that is due to be paid in less than two years by staggering its
issuance, by issuing eligible LTD that is due to be paid after a longer
period, or by redeeming and replacing eligible LTD once the amount due
to be paid falls below two years.
The Board is proposing to amend the TLAC rule to change the
haircuts that are applied to eligible LTD for purposes of compliance
with the TLAC requirement to conform to the haircuts that apply for
purposes of the LTD requirement. Accordingly, the proposed rule would
allow only 50 percent of the amount of eligible LTD with a maturity of
one year or more but less than two years to count towards the TLAC
requirement. This change would simplify the rule so that the same
haircut regime applies across the TLAC
[[Page 64547]]
and LTD requirements. Adopting the 50 percent haircut for the TLAC
requirement also would support the goals the Board noted for applying
the haircut for purposes of the LTD rule. Applying the haircut to the
TLAC requirement would improve TLAC companies' management of the tenor
of their eligible LTD. The proposed change would incentivize firms to
reduce reliance on eligible LTD with maturities of less than two years
and increase the TLAC requirement for firms that rely heavily on
eligible LTD with maturities of less than two years.
Staff analyzed the change in TLAC ratios that would be implied by
this proposed 50 percent haircut on eligible LTD maturing between one
and two years. Seventeen entities are currently subject to TLAC
requirements, eight of which are U.S. GSIBs and nine of which are
foreign GSIB IHCs. The staff analysis relied on data from the FR Y-9C
as of March 2023. On this basis, overall aggregate TLAC at these
seventeen GSIBs would decline by roughly $65 billion (some 2.7 percent)
as a result of the proposed change to the eligible LTD haircut.
Based on these estimates, staff projects that all GSIBs would meet
or nearly meet their TLAC requirements under the proposed change.\83\
Staff did not consider whether the proposal might prompt behavioral
changes at the seventeen GSIBs, primarily because the magnitudes of
possible declines in TLAC and the potential associated effects appear
to be modest, as discussed above. However, staff would anticipate that
impacted entities would adjust their issuance to mitigate the impact of
this change.
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\83\ The agencies recognize that their Basel III reforms
proposal would, if adopted, increase risk-weighted assets for this
group of firms, which would mechanically increase TLAC requirements
and create moderate projected shortfalls in TLAC at several GSIBs.
The change in eligible LTD proposed here could modestly increase the
size and number of TLAC shortfalls beyond those projected as a
result of the Basel III proposal.
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The agencies invite comment on the implications of the interaction
of the proposal to modify the eligible LTD haircut with proposed
changes to the agencies' capital rule under the Basel III proposal.
Question 58: How would a different remaining maturity requirement
or amortization schedule better achieve the objectives of the TLAC
rule?
B. Minimum Denominations for LTD Used To Satisfy TLAC Requirements
The Board proposes to amend the TLAC rule so that eligible LTD must
be issued in minimum denominations for the same reasons discussed in
section III.C.7 of this supplementary information section.
Question 59: Should the Board impose a higher minimum denomination
for TLAC companies subject to the TLAC rule? Should the minimum
denomination be higher (e.g., $1 million) for companies subject to the
TLAC rule than for covered entities subject to the newly proposed LTD
requirement?
C. Treatment of Certain Transactions for Clean Holding Company
Requirements
The TLAC rule applies clean holding company requirements to the
operations of TLAC HCs to further improve their resolvability and the
resiliency of their operating subsidiaries.\84\ One of these
requirements is that a TLAC HC must not enter into a QFC, with the
exception of entry into certain credit enhancement arrangements with
respect to QFCs between a TLAC HC's subsidiary and third parties, with
a counterparty that is not a subsidiary of the TLAC HC (the ``QFC
prohibition'').\85\ The final rule defined QFC as it is defined in 12
U.S.C. 5390(c)(8)(D).\86\ This definition includes a ``securities
contract,'' which is further defined to mean ``a contract for the
purchase, sale, or loan of a security, . . . a group or index of
securities, . . . or any option on any of the foregoing, including any
option to purchase or sell any such security, . . . or option. . . .''
\87\
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\84\ See 12 CFR 252.64 and 12 CFR 252.166.
\85\ See 12 CFR 252.64(a)(3).
\86\ See 12 CFR 252.61 ``Qualified financial contract.''
\87\ Id.
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The Board explained that the QFC prohibition would mitigate the
substantial risk that could be posed by the failure of a large banking
organization that is a party to a material amount of third-party QFCs.
First, the Board noted that TLAC HCs' operating subsidiaries, which are
parties to large quantities of QFCs, are expected to remain solvent
under an SPOE resolution and not expected to fail to meet any ordinary
course payment or delivery obligations during a successful SPOE
resolution. Therefore, assuming that the cross-default provisions of
the QFCs engaged in by the operating subsidiaries of TLAC HCs are
appropriately structured, their QFC counterparties generally would have
no contractual right to terminate or liquidate collateral on the basis
of the TLAC HC's entry into resolution proceedings. Second, the TLAC
HCs themselves would be subject to a general prohibition on entering
into QFCs with external counterparties, so their entry into resolution
proceedings would not result in substantial QFC terminations and
related fire sales. The restriction on third-party QFCs would therefore
materially diminish the fire sale risk and contagion effects associated
with the failure of a TLAC HC.
In its administration of the rule since it was finalized, the Board
has gained experien
[…truncated; see source link]Indexed from Federal Register on September 19, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.