Federal Reserve Board of Governors
Open Meeting – Final Rule on Total Loss Absorbing Capacity
Thursday, December 15, 2106
Key Topics & Takeaways
• Final Rule Approved: The Board of Governors unanimously approved the final rule on Total Loss Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements.
• Resolution: Governor Tarullo highlighted the importance of confidence in resolution mechanisms, and argued that the TLAC rule would ensure firms can be recapitalized by private investors rather than by taxpayers.
• Criteria for Long-Term Debt: Anna Harrington, Counsel, commented on the criteria for eligible long-term debt. While the criteria from the 2015 proposal remain in place, she added that debt with acceleration clauses that is issued before December 31, 2016 will be grandfathered in.
• Janet Yellen, Chair, Federal Reserve Board of Governors
• Stanley Fischer, Vice Chairman
• Daniel Tarullo, Governor
• Jerome Powell, Governor
• Lael Brainard, Governor
• Michael Gibson, Director, Banking Supervision and Regulation
• Anna Harrington, Counsel
• Sean Campbell, Associate Director, Banking Supervision and Regulation
• Will Giles, Counsel
• Mark Van Der Weide, Deputy Director, Banking Supervision and Regulation
In her opening statement, Federal Reserve Chair Janet Yellen said the Federal Reserve’s final rule for total loss absorbing capacity (TLAC) is “one the last critical safeguards” of the post-crisis reform agenda, and that it is based on the common-sense principles that banks must bear the costs that come with their size and the costs their failures would impose on the economy. She stressed that the rule would mean better protection for taxpayer funds and would keep the financial system strong and stable for the sake of American workers and businesses.
Governor Daniel Tarullo said the response to the financial crisis has been to build the resiliency of financial institutions, but also to ensure a viable path towards their resolution that would not require the injection of taxpayer money. He highlighted the importance of confidence in resolution mechanisms, and stated that the TLAC rule would ensure firms can be recapitalized by private investors rather than by taxpayers.
Michael Gibson, Director of Banking Supervision and Regulation, reiterated that the requirements of the final rule would ensure that banks can be recapitalized without taxpayer funds and without spillovers by mandating that banks fund themselves with long-term debt that can be converted into equity.
Anna Harrington, Counsel, commented on the criteria for eligible long-term debt. While the criteria from the 2015 proposal remain in place, she added that debt with acceleration clauses that is issued before December 31, 2016 will be grandfathered in.
Sean Campbell, Associate Director, Banking Supervision and Regulation, stated that the rule includes a contractual conversion trigger for international holding companies, and that staff decided the benefits of such a trigger outweigh the costs and concerns raised by commenters. He also highlighted the clean holding company requirements that create restrictions against certain activities, saying that they would limit complexity to ensure that resolution can be conducted in an orderly manner.
Board Questions and Comments
Yellen asked about banks’ shortfall in meeting the TLAC requirements. Harrington replied that the shortfall has shrunk from $120 billion last year to about $70 billion today, with the drivers being declines in risk-weighted assets, the raising of capital, and the issuance of more long-term debt.
Yellen then asked how the U.S. TLAC standard would compare to other jurisdictions. Harrington said the creation of a standard by the Financial Stability Board (FSB) makes it more likely that other jurisdictions will adopt comparable standards.
Vice Chairman Stanley Fischer and Governor Jerome Powell asked how the TLAC rule fits in with Dodd-Frank resolution planning requirements. Will Giles, Counsel, said it relates to resolution planning requirements by ensuring confidence in resolution mechanisms, including Title II Orderly Liquidation Authority and the bankruptcy regime.
Tarullo asked about the market for TLAC debt and whether its creation would in fact increase interconnectedness. Mark Van Der Weide, Deputy Director, Banking Supervision and Regulation, noted that the bulk of globally systemically important banks’ debt is held by non-bank investors.
Governor Lael Brainard expressed her support for the rule, calling it critical to ensuring that the largest and most complex institutions can be resolved.
The Board of Governors unanimously approved the final rule.
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