The federal banking agencies proposed a rule this week to reduce the impact from failure of the largest banks.
The largest banks – known as global systemically important bank holding companies (GSIBs) — are required to issue debt with certain features under the “total loss-absorbing capacity,” or TLAC, rule. That means that debt would be used to recapitalize the holding company during bankruptcy or resolution if it were to fail. GSIBs are banks that have $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure.
This new proposal would complement other measures that the federal banking agencies – including the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency — have taken to limit interconnectedness among large banks.
The proposal would require banks to hold additional capital against substantial holdings of TLAC debt to discourage GSIBs from purchasing large amounts of TLAC debt. This would reduce interconnectedness between large banks and reduce the impact on the financial system if a GSIB were to fail.
The proposal from the would also require the holding companies of GSIBs to report their TLAC debt outstanding. The federal banking agencies are accepting comments on this rule for 60 days following publication in the Federal Register.