Federal Bank Regulatory Agencies Finalize Rule to Limit Interconnectedness of Largest Banking Organizations

Strategic Insights -

The Federal Reserve Board, alongside the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, has finalized a rule aimed at reducing the interconnectedness and mitigating the impact of failure from the largest banking organizations in the US. This move complements existing measures to limit interconnectedness among these institutions. Under the rule, U.S. global systemically important bank holding companies, or GSIBs, and their intermediate holding companies will be required to issue debt with specific features. This debt can be used to recapitalize the holding company in the event of bankruptcy or resolution.

Key Takeaways:

  • The final rule limits the interconnectedness of the largest banking organizations by prescribing a more stringent regulatory capital treatment for holdings of Total Loss-Absorbing Capacity (TLAC) debt.
  • TLAC debt, which can be used to recapitalize the holding company in the event of bankruptcy or resolution, will be subject to a more stringent regulatory capital treatment, discouraging the largest banking organizations from purchasing it.
  • The final rule requires U.S. GSIBs and their intermediate holding companies to report publicly their outstanding TLAC debt, enhancing transparency.
  • The rule is designed to reduce the potential impact of a GSIB failure on the US financial system.
  • The regulation aims to reduce interconnectedness between the largest banking organizations and mitigate the effects of their failure.
  • The final rule is substantially similar to a proposal announced in 2020.
  • The effective date of the rule is April 1, 2021.

Statistics:

  • The final rule targets U.S. global systemically important bank holding companies (GSIBs) and their intermediate holding companies.
  • The regulation affects U.S. GSIBs and their intermediate holding companies, which are subject to stricter regulatory capital requirements.
  • The rule will be implemented on April 1, 2021.
  • TLAC debt will be required to have specific features to be eligible for use in recapitalizing the holding company in the event of bankruptcy or resolution.
  • The regulatory capital treatment for TLAC debt will be more stringent, making it less attractive for GSIBs to purchase.

Sources:

  • Board of Governors of the Federal Reserve System
  • Federal Deposit Insurance Corporation
  • Office of the Comptroller of the Currency
  • Federal Reserve Board's "total loss-absorbing capacity" rule
  • U.S. global systemically important bank holding companies (GSIBs)
  • U.S. intermediate holding companies of foreign GSIBs