Comment period extended until January 16, 2024. https://www.federalreserve.gov/newsevents/pressreleases/bcreg20231122a.htm
1) OCC Aug 29 [press release] -- On August 29, 2023, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (the board), and the Federal Deposit Insurance Corporation (collectively, the agencies) issued a joint notice of proposed rulemaking that would require certain large depository institution holding companies, U.S. intermediate holding companies of foreign banking organizations (collectively, large banking organizations [LBO]), and certain insured depository institutions (IDI) to issue and maintain an outstanding minimum amount of long-term debt (LTD). The LTD requirement would improve the resolvability of these LBOs and IDIs in case of failure, reduce costs to the Deposit Insurance Fund, and mitigate contagion and financial stability risks by reducing the risk of loss to uninsured depositors.
The agencies encourage stakeholders to review the proposed rule and provide comments before the close of the comment period on November 30, 2023.
Note for Community Banks: The proposed rule would not apply to community banks.
The agencies are proposing a rule to improve the resolvability of LBOs and certain large IDIs (collectively, banks) by requiring a minimum amount of LTD that can absorb losses in the event of failure.
-- U.S. global systemically important bank (GSIB) holding companies and intermediate holding companies of foreign GSIBs are currently subject to LTD requirements under the board’s total loss absorbing capacity rule.1 The proposed rule would expand minimum LTD requirements to other LBOs and to certain IDIs of LBOs.
-- The proposed rule would require that the top-tier LBO issue the LTD externally.
-- An IDI that is a subsidiary of an LBO and that either (1) has at least $100 billion in total assets or (2) is affiliated with an IDI with at least $100 billion in total assets would generally be required to issue LTD internally to a consolidating parent LBO to ensure sufficient loss absorbing resources at the IDI.
In the case of an IDI with at least $100 billion in total assets without a holding company subject to the proposal, the IDI would be allowed to issue the LTD either internally or externally.
-- The LTD requirement would equal the largest of the following amounts: 6 percent of risk-weighted assets; 2.5 percent of total leverage exposure (as defined under the supplementary leverage ratio rule) for banks subject to the supplementary leverage ratio; and 3.5 percent of average total consolidated assets (the denominator of the tier 1 leverage ratio).
-- The proposal includes a three-year phased-in transition period. Banks would be required to meet 25 percent of the requirement at the end of year one, 50 percent of the requirement at the end of year two, and 100 percent of the requirement at the end of year three. Banks that cross the $100 billion threshold in the future would be subject to the same three-year phased transition.
-- The requirements for eligible LTD instruments would be similar to those in the board’s total loss absorbing capacity rule. As a general matter, LTD securities would need to be unsecured, “plain vanilla” (the rule would exclude complex instruments such as structured notes and other instruments with derivative-linked features), governed by U.S. law, contractually subordinated, and have an outstanding maturity greater than one year. The outstanding principal amount of securities with a maturity of less than two years but greater than one year, eligible to count toward the new requirement would be subject to a 50 percent haircut. Securities with a maturity greater than two years would not be subject to a haircut. Certain outstanding debt instruments would be “grandfathered” even if they do not meet all the eligibility requirements.
-- The proposal would also require certain banks to deduct investments in other banks’ LTD that exceed certain amounts.
In providing loss-absorbing capacity, LTD can give policymakers greater flexibility in responding to bank failures. In the resolution of an IDI, sufficient LTD issued and maintained by an IDI that consequently fails may increase the likelihood of an orderly resolution for the IDI. In addition, the proposed LTD requirement could improve the resilience of banks by enhancing the stability of their funding profile and strengthening market discipline.
Fact sheet: https://www.occ.gov/news-issuances/news-releases/2023/nr-ia-2023-94b.pdf
OCC press release: https://www.occ.gov/news-issuances/bulletins/2023/bulletin-2023-29.html
2) Aug 29 -- FDIC press release https://www.fdic.gov/news/press-releases/2023/pr23065.html
3) Sept 19 -- 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. Comments must be received on or before November 30, 2023.
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. 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).
To address these risks, the Board is proposing to require Category II, III, and IV bank holding companies (BHCs) and 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. 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.
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. . . .