These institutions will be required to meet a new long-term debt requirement and a new "total loss-absorbing capacity," or TLAC, requirement. The final rule applies to domestic firms identified by the Board as global systemically important banks (GSIBs) and to the U.S. operations of foreign GSIBs.
To reduce the systemic impact of the failure of a GSIB, a bankruptcy or statutory orderly resolution process imposes the losses of a failed GSIB on investors rather than taxpayers as the critical operations of the firm continue to function. Requiring a GSIB to maintain sufficient amounts of long-term debt, which can be converted to equity during resolution, would help achieve this objective by providing a source of private capital to support the firm's critical operations during resolution.
"The rule is guided by common sense principles: bank shareholders and debt investors should place their own money at risk so depositors and taxpayers are well protected, and the biggest banks must bear the costs that come with their size," Chair Janet L. Yellen said.
Like the proposal issued in October 2015, the final rule will set a minimum level of long-term debt for domestic GSIBs and the U.S. operations of foreign GSIBs that could be used to recapitalize the critical operations of the firms upon failure. The complementary TLAC requirement will set a new minimum level of total loss-absorbing capacity, which can be met with both regulatory capital and long-term debt. These requirements will improve the prospects for the orderly resolution of a failed GSIB and will strengthen the resiliency of all GSIBs.
"While equity is far and away the best form of capital to ensure the resilience of a firm,
the whole point of resolution planning is to prepare for the eventuality, no matter how unlikely, that the firm might become insolvent in some circumstances," Governor Daniel K. Tarullo said. "By definition, at that point equity capital will either be totally lost, or at least below the level markets have historically required for a financial intermediary to be credible. The long-term debt required by this proposal would survive the disappearance of a bank's equity and resultant failure, and would be available for conversion into new equity."
The final rule also will require the parent holding company of a domestic GSIB to avoid entering into certain financial arrangements that would create obstacles to an orderly resolution. These "clean holding company" requirements will include bans on issuance of short-term debt to external investors and on entering into derivatives and certain other types of financial contracts with external counterparties.
In response to comments received on the proposed rule, the Board made several notable changes:
- The final rule will grandfather long-term debt issued on or before December 31, 2016, by allowing it to count toward a firm's long-term debt requirement even if the debt has certain contractual clauses not allowed by the rule. To count toward a firm's long-term debt requirements, debt issued after that date will need to fully comply with the rule;
- While foreign firms' U.S. operations will generally be required to issue long-term debt to their foreign parent, the U.S. operations of certain foreign firms will be permitted to issue long-term debt to external parties, rather than solely to their parent companies, consistent with their resolution strategy; and
- The long-term debt requirements of foreign firms were slightly reduced to be consistent with the treatment of domestic firms, reflecting the expectation that the losses of those firms would slightly reduce their balance sheets and the capital needed for recapitalization.
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Federal Register Notice (PDF)
Opening Statement by Chair Janet L. Yellen
Opening Statement by Governor Daniel K. Tarullo
Statement by Governor Lael Brainard