Resolution-Related Resource Requirements for Large Banking Organizations
Advance notice of proposed rulemaking; request for comment.
CFR Part: "12 CFR Chapter II"; "12 CFR Chapter III"
RIN Number: "RIN 7100-AG44"; "RIN 3064-AF86"
Citation: "87 FR 64170"
Document Number: "Docket No. R-1786"
Page Number: "64170"
"Proposed Rules"
Agency: "
SUMMARY:
DATES:
Comments must be received on or before
ADDRESSES: Interested parties are encouraged to submit written comments jointly to both agencies. Commenters are encouraged to use the title "ANPR Resolution-Related Resource Requirements for Large Banking Organizations" to facilitate the organization and distribution of comments between the agencies. Commenters are also encouraged to identify the number of the specific question for comment to which they are responding. Comments should be directed to:
Board: You may submit comments, identified by Docket No. R-1786 and RIN 7100-AG44 by any of the following methods:
* Agency Website: https://www.federalreserve.gov. Follow the instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia//ProposedRegs.cfm.
* Email: [email protected]. Include docket and RIN numbers in the subject line of the message.
* Fax: 202-452-3819 or 202-452-3102.
* Mail:
Public Inspection: All public comments are available from the Board's website at https://www.federalreserve.gov/generalinfo/foia//ProposedRegs.cfm as submitted. Accordingly, comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper in Room M-4365A,
* Agency Website: https://www.fdic.gov/resources/regulations/federal-register-publications/. Follow instructions for submitting comments on the Agency website.
* Email: [email protected]. Include RIN 3064-AF86 on the subject line of the message.
* Mail:
* Hand Delivery/Courier: Comments may be hand delivered to the guard station at the rear of the
Public Inspection: Comments received, including any personal information provided, may be posted without change to https://www.fdic.gov/resources/regulations/federal-register-publications/. Commenters should submit only information that the commenter wishes to make available publicly. The
FOR FURTHER INFORMATION CONTACT:
Board:
SUPPLEMENTARY INFORMATION:
Background Over the past decade, the
FOOTNOTE 1 E.g., Regulation QQ, 12 CFR part 243 (joint resolution planning rule); Regulation YY, 12 CFR part 252 (Board's enhanced prudential standards, including TLAC). END FOOTNOTE
FOOTNOTE 2 SR Letter 14-1, Heightened Supervisory Expectations for Recovery and Resolution Preparedness for Certain Large Bank Holding Companies--Supplemental Guidance on Consolidated Supervision Framework for Large Financial Institutions (SR Letter 12-17/CA Letter 12-14) (
FOOTNOTE 3 12 CFR 360.10. END FOOTNOTE
For large banking organizations that are not
FOOTNOTE 4 The term large banking organization refers to a domestic bank holding company, or domestic savings and loan holding company, that has
FOOTNOTE 5 Category II banking organizations have
FOOTNOTE 6 In
FOOTNOTE 7 U.S. intermediate holding companies of global systemically important foreign banking organizations, however, are subject to internal TLAC and long-term debt requirements. See 12 CFR part 252, subpart P. END FOOTNOTE
Since resolution-related rules and guidance were adopted, the
FOOTNOTE 8 See FR Y-9C Schedule HC--Consolidated Balance Sheet, for Category II and III bank holding companies. END FOOTNOTE
For the vast majority of bank resolutions, the
In addition, some large banking organizations have increased their reliance on large uninsured deposits to fund their operations over the past decade. These deposits may be less stable relative to insured deposits under conditions of firm-specific stress and resolution. Uninsured deposits comprise a significant portion of Category II and III banking organizations' funding base, standing at roughly 40% of total deposits as of the first quarter of 2022 as a group. /9/ While GSIBs also have high levels of uninsured deposits, the regulatory resolution framework that has been built up around them--including TLAC and long-term debt requirements--help to mitigate related risks.
FOOTNOTE 9 See Call Report Schedule RC-O--Other Data for
Finally, some large banking organizations have heightened cross-jurisdictional activity or significant non-bank operations that could present challenges to orderly resolution due to the complexities of coordinating among resolution authorities. While size alone can limit options and increase the potential negative impacts in the resolution of an IDI, other complexities can create risks from and impediments to resolution, including significant international operations requiring cross-border cooperation, and material operations, assets, liabilities and services outside the bank chain. These complicating features of bank resolution can raise challenges to the feasibility of creating and stabilizing a viable bridge depository institution or other resolution strategies for a failing insured depository institution due to multiple competing insolvencies, discontinuity of operations, and the destruction of value, and result in a disorderly and costly resolution.
As the profile of large banking organizations continues to evolve, with larger balance sheets and increased volume of uninsured deposits, and potentially more complex organizations, the agencies are considering whether additional measures are warranted to address financial stability impacts that might be associated with the failure of such firms. This includes whether an extra layer of loss-absorbing capacity could increase the
GSIB vs. Large Banking Organization Resolution
GSIB and other large banking organization resolution strategies tend to follow one of two generally recognized approaches to resolution. /10/ As described in the public sections of their resolution plans, the
FOOTNOTE 10 See 82 FR 8266, 8270 n.29 (
By allowing subsidiaries to continue operating after the resolution of the top-tier holding company, the SPOE resolution process limits the risk of multiple competing resolution processes across multiple resolution authorities and jurisdictions that could greatly complicate the resolution of a failing firm and impede the continuity of critical operations. An SPOE resolution also avoids losses to subsidiaries' third-party creditors and may reduce the need for asset fire sales that could pose broader risks to financial stability. The TLAC, long-term debt, and clean holding company requirements that the Board has applied to the
Unlike the GSIBs, most large banking organizations do not have material broker dealers or international operations, and their assets and liabilities most often are overwhelmingly concentrated in the depository institution entity. Some have significant international footprints or significant activities, assets, and services outside the bank chain, but have less complex operations and fewer systemically important critical operations. As described in the public sections of the resolution plans filed by Category II and III large banking organizations, a multiple-point-of-entry (MPOE) resolution strategy is generally contemplated by these firms, in which the parent holding company would enter bankruptcy and the insured depository institution subsidiary would undergo
Drawing on that experience, the
Public Input
The agencies periodically review their existing regulations to ensure they appropriately address risks to safe and sound banking and financial stability and are issuing this ANPR to explore whether and how resolution-related standards applicable to large banking organizations could be strengthened to enable a more efficient resolution of a large banking organization, while mitigating effects to the financial system. The agencies are considering tiered requirements that distinguish between the set of standards in this area that are applied to GSIBs and the framework to be applied to other large banking organizations, given differences between their resolution strategies as well as large banking organizations' smaller size, less complex operations, and generally more limited operations outside of their
Long-Term Debt
The agencies are exploring whether requiring additional ex ante financial resources, such as qualifying forms of long-term debt, including at the insured depository institution, would improve the prospects for successful resolution of large banking organizations, the potential costs and the appropriate scope of any such requirement. The Board's current long-term debt requirements were designed to ensure that
While the current long-term debt requirement applicable to
The availability of this loss-absorbing resource at the insured depository institution would protect deposits and thereby increase the likelihood that a transfer to a bridge insured depository institution to preserve franchise value would be less costly to the DIF than a payout of insured deposits. Use of a bridge insured depository institution would enhance the
Thus, to limit the impact of a firm's failure on the DIF and decrease potential risks to financial stability, certain large banking organizations could be required to maintain long-term debt at the insured depository institution that meets certain specified characteristics /11/ in order to (i) absorb losses at a large banking organization as it undergoes resolution; (ii) support the viability of restructuring options such as the sale of various subsidiaries, branch networks, or business lines; or (iii) support a public spin-off of the restructured entity upon its emergence from resolution.
FOOTNOTE 11 Such characteristics would necessarily include an appropriate form of subordination. As described in the adopting release for the TLAC rule, debt issued by a parent holding company is considered structurally subordinated to debt of the parent's insured depository institution subsidiary. Debt issued by an insured depository institution subsidiary, either externally or internally, would generally need to benefit from contractual or statutory subordination features in order to reliably serve as loss-absorbing capacity in resolution. END FOOTNOTE
For these reasons, the agencies are considering the advantages and disadvantages of requiring large banking organizations that meet some specified categorization threshold to maintain long-term debt capable of absorbing losses in resolution.
Question 1: The agencies invite comment on whether and how a requirement to maintain a minimum amount of long-term debt could enhance a large banking organization's resolvability. How might long-term debt be beneficial for improving optionality when conducting the resolution of a
Question 2: The agencies invite comment on alternative approaches for determining the appropriate scope of application of a potential long-term debt requirement to the population of large banking organizations. In particular, what criteria would be relevant to determine whether a large banking organization should be subject to the requirement? Should all Category II and, Category III firms (including SLHCs, which are not subject to resolution planning requirements) be subject to a long-term debt requirement? Why or why not? What additional factors--for example, the presence of significant non-bank operations, critical operations, critical services outside the bank chain, cross-border operations, or extent of reliance on uninsured deposits--should the agencies consider when determining the scope of application of any long-term debt requirement to large banking organizations? Given the practical and market limitations for selling large insured depository institutions, especially during a crisis, what is the appropriate scope of application for a loss absorbing debt requirement to expand the range of strategies available to the
Question 3: The agencies invite comment on how any new requirements should be applied to the
FOOTNOTE 12 12 CFR 252.153(a). END FOOTNOTE
Question 4: The agencies invite comment on the appropriateness of recognizing debt issued by various legal entities within a holding company structure in determining compliance with any long-term debt requirement imposed on the top tier holding company. Specifically, to what extent should the Board consider whether a large banking organization's resolution strategy is an SPOE or MPOE strategy, whether the long-term debt is issued by the parent holding company or the insured depository institution, or other factors in determining the requirement?
The current long-term debt calibration for
Question 5: The agencies invite comment on the appropriate calibration of a long-term debt requirement for large banking organizations. Should the agencies establish the same calibration as is currently in effect for intermediate holding companies of foreign GSIBs or establish a different calibration? What are the advantages and disadvantages of applying a calibration designed to require sufficient resources to recapitalize a large banking organization's subsidiaries in the event equity capital is fully depleted, in order to continue operations either under an SPOE or MPOE resolution strategy? How should the agencies weigh the burden of additional requirements against the potential benefit to financial stability? What other factors should the agencies consider to calibrate a long-term debt requirement for large banking organizations or insured depository institutions that would provide sufficient optionality to address material distress or failure in a manner that limits risk to financial stability over time? How should the agencies consider competitive equality in calibrating any long-term debt requirements for large banking organizations relative to existing requirements for GSIBs and top tier IHC holding companies of foreign banking organizations? What data should be considered to support calibration determinations?
Question 6: The agencies invite comment on the potential effect of a long-term debt requirement on large banking organizations in different tiering categories (for example, Category II and Category III) and on the capacity of these firms to issue such debt into the market throughout an economic cycle. What are the potential effects of a long-term debt requirement on these firms' funding model and funding costs, including any associated effect on market discipline and overall firm resiliency? What, if any, are the potential effects of a long-term debt requirement on the cost and availability of credit?
Under the TLAC rule applicable to GSIBs, only debt instruments that meet certain requirements /13/ may be included in a GSIB's outstanding external TLAC amount. The general purpose of these requirements, certain of which are discussed below, is to ensure the ability of eligible long-term debt instruments to readily absorb losses in an SPOE resolution. The agencies are evaluating whether certain components of the eligibility requirements that must be satisfied for long-term debt to qualify as "eligible long-term debt" under the existing TLAC rule that applies to
FOOTNOTE 13 See 12 CFR 252.61--Eligible debt security. END FOOTNOTE
1. Issuance by the
To ensure that a debt instrument can be used to absorb losses incurred anywhere in the banking organization, the GSIB TLAC rule specifies that eligible long-term debt must be issued by the top-tier holding company of a banking organization. /14/ Debt externally issued by a subsidiary generally is only available to absorb losses in a resolution of that particular subsidiary.
FOOTNOTE 14 In their resolution planning,
2. Clean Holding Company Requirements
In addition, the top-tier holding companies of the GSIBs are also subject to specified "clean holding company" requirements. These requirements include prohibitions on issuance of short-term debt to external investors and on entry into derivatives and certain other types of financial contracts and arrangements that would create obstacles to an orderly resolution.
The agencies are interested in whether these holding company requirements can or should be adapted to support the resolution of large banking organizations and how to create a layer of gone-concern loss-absorbing capacity that can most effectively be used to absorb losses in various scenarios.
In addition, the agencies are interested in whether any of the eligibility requirements to be treated as "eligible long-term debt" under the existing TLAC rule can or should be adapted to support the resolution of large banking organizations.
Question 7: The Board invites comment on the pros and cons of permitting eligible long-term debt issued externally by a large banking organization's principal insured depository institution subsidiary to count toward a requirement at the top-tier holding company. In what situations might requiring issuance at the holding company level be most beneficial? What range of approaches--other than requiring issuance by the top-tier holding company--may be available to ensure that eligible long-term debt will be available to absorb losses incurred at appropriate legal entities within a given large banking organization's corporate group?
Question 8: The agencies invite comment on whether requirements on governance mechanics should be put in place to ensure that entry into resolution will occur at a time when the eligible long-term debt will be available at the insured depository institution and/or the holding company level to absorb losses? Should such requirements include whether the loss absorbing capacity can absorb losses incurred at appropriate legal entities within a given large banking organization's corporate group? To what extent should such mechanics be aligned with internal recovery planning frameworks to coordinate resolution preparation actions with recovery actions?
Question 9: The agencies invite comment on whether subjecting the operations of the top-tier holding company of large banking organizations to "clean holding company" limitations similar to the ones imposed on GSIBs would further enhance the resolvability of a large banking organization. Why or why not?
Question 10: Among the other requirements that must be satisfied under the existing GSIB TLAC rule in order for debt issued by the parent company to qualify as eligible long-term debt (for example, relating to "plain vanilla" characteristics, minimum remaining maturity, governing law), which requirements would remain essential in order for long-term debt instruments issued by large banking organizations to properly function as a loss-absorbing resource in resolution? What modifications of such requirements, if any, should the agencies consider in the large banking organization context with respect to loss absorbing debt at insured depository institutions and/or holding companies?
Disclosure
Under the TLAC rule applicable to GSIBs, firms are required to provide the LTD debtholders a description of the financial consequences that could occur if the GSIB entered into a resolution proceeding as well as a summary table of the location of the disclosures (e.g., on the GSIB's website, in public financial reports or public regulatory reports). Where it is necessary to bail-in the LTD, the value of the debtholder's note may be significantly or completely depleted.
Question 11: The agencies invite comment on the appropriate form and content of the disclosure large banking organizations should be required to provide to their long-term debt investors with respect to the potential treatment of such debt in resolution. If LTD requirements are imposed on large banking organizations, what, if any, adaptations should be made relative to the disclosure requirements that apply to GSIBs?
Separability
The agencies are also evaluating whether they should, for some or all large banking organizations, establish separability requirements in the recovery or resolution contexts.
When a large banking organization encounters internal or external stresses or ultimately enters resolution the identification of executable "separability options," such as the sale, transfer, or disposal of significant assets, portfolios, legal entities or business lines on a discrete product line or regional basis could provide alternatives to a wholesale acquisition of a large banking organization's operations by a larger institution such as an existing GSIB.
Question 12: Should the agencies impose any separability requirements for recovery or resolution on all large banking organizations, including GSIBs? To what extent would imposing new separability requirements add net benefits against the backdrop of other existing requirements? In what fashion can or should these requirements be harmonized to promote their effectiveness?
By order of the
Deputy Associate Secretary of the Board.
By order of the Board of Directors.
Dated at
Assistant Executive Secretary.
[FR Doc. 2022-23003 Filed 10-21-22;
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