Federal bank regulatory agencies today requested comment on a proposal that would require large banks with total assets of $100 billion or more to maintain a layer of long-term debt, which would improve financial stability by increasing the resolvability and resiliency of such institutions.
This proposal follows an advance notice of proposed rulemaking issued in October 2022 by the Federal Reserve and the Federal Deposit Insurance Corporation that looked at several possible changes, including a long-term debt requirement to promote more orderly resolutions for large banks. The recent failures of three large banks have underscored the importance of supplementary, loss absorbing resources that regulators can use to resolve banks in a way that reduces costs and risk of disruption to the banking system.
By requiring each large bank to maintain a minimum amount of long-term debt to absorb losses, the proposal would increase the options available to resolve such banks in case of failure. Additionally, by reducing the risk that uninsured depositors would face losses, long-term debt can reduce the speed and severity of bank runs, and limit the risk of contagion when a bank is under stress.
This proposal is designed to address the risks specific to large banks that are not global systemically important banks (GSIBs) and would not materially change the existing requirements already in place for GSIBs. Additionally, the proposal would prohibit large banks from engaging in certain activities that could complicate their resolution and would disincentivize these banks from holding long-term debt issued by other banks to reduce interconnectedness and contagion in the banking system.
The proposal would provide a three-year phase-in period and would also allow certain outstanding long-term debt to count toward the minimum requirements to provide banks with a reasonable period to transition to the required characteristics of eligible long-term debt instruments.
Comments on the proposal are due by November 30, 2023.
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