The Independent Community Bankers of America (ICBA) has come out in favor of a new proposal by federal regulators that would require banks with $100 billion or more in assets to hold minimum levels of long-term debt.
Under the interagency proposal, category II, III, and IV large banks would join category I systemically important financial institutions in holding sufficient levels of long-term debt issued to third parties. Regulators could convert the long-term debt into common equity tier 1 capital to unwind failing institutions without systemic disruptions.
“Large banks over $100 billion should be required to maintain long-term debt with characteristics similar to those required for global systemically important banking organizations,” ICBA President and CEO Rebeca Romero Rainey said. “As ICBA has long said, applying stricter capital, debt, and resolution standards on the largest banks will help address the nation’s too-big-to-fail problem while allowing community banks to continue meeting the needs of local customers and communities.”
In a comment letter to federal banking regulators, ICBA said the proposal would help protect community banks from the failures of megabanks by allowing the capital markets to absorb the risk. Also, they said the market pricing of these instruments could help identify potential safety and soundness stresses within these institutions. It could also incentivize large bank management teams to maintain high-quality regulatory capital.
Further, the proposal increases the chances that community banks could bid on the assets or liabilities of a failed large bank, because the proposal offers management teams more time to evaluate risks and opportunities.
In addition, the debt proposal aligns with ICBA’s support for a previous agency proposal to enhance long-term debt standards for large institutions to reduce the likelihood that large failure would require extraordinary government intervention.