On August 29, United States financial regulators including the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) took a significant step towards strengthening the financial stability of major banks. In an announcement, the agencies issued a notice of proposed rulemaking with a request for public comment. This proposed rule, if enacted, would require banks with total assets of $100 billion or more to maintain a layer of long-term debt.
The motivation behind this proposed rule is to improve the ‘resolvability’ of these large financial institutions. The term ‘resolvability’ refers to the ability of a bank to go through bankruptcy without causing significant harm to its customers, its employees, or the wider economy. This rule, therefore, serves a twofold purpose. First, it reduces the risk that a financial crisis at a major bank will spill over into the broader economy. Second, it places the burden of a potential bankruptcy more squarely on the shoulders of bank investors rather than taxpayers.
This move is timely, particularly against the backdrop of ongoing economic uncertainty due to the COVID-19 pandemic. The proposed rule will act as an additional safety net for banks, indirectly benefiting their customers and the economy at large. By asking the largest banks to hold more long-term debt, officials hope to create a cushion that can absorb losses and prevent a bank’s failure from causing systemic shockwaves.
It now falls on the larger banking community as well as the wider public to study this proposal and voice their thoughts and concerns. As per the agencies’ notice, they are inviting feedback on this proposed rule, marking an important phase of soliciting public input in this major policy decision.
For those interested in the details of this proposal, or to add their voice to the discussion, the full text is available at this link.