On April 14, 2016, the Systemic Risk Council submitted a comment letter to Janet Yellen, Chair of the Board of Governors of the Federal Reserve System (the “Fed”), commenting on the recent proposed rulemaking introducing total loss-absorbing capacity (“TLAC”) and long-term debt (“LTD”) requirements aimed at minimizing the disorder from the failure of large and complex banks without invoking taxpayer solvency support.
The letter states the Council’s strong support of the Fed’s proposed rule, which it believes is an important initiative in the quest to reduce the costs to the public of the failure of large and complex financial groups. The letter urges the Fed to maintain a separate LTD requirement as a core part of its TLAC proposal, as that would serve to supplement the equity cushion that these firms choose to hold over and above the minimum equity requirement.
To strengthen the Fed’s proposal, the Council’s letter also makes the following key recommendations:
- Introduce a minimum requirement for the internal debt issued by subsidiaries to parent companies so that losses in excess of equity can be transmitted smoothly to the holding company during periods of stress;
- Review the approach to TLAC requirements for the U.S. subgroups of those foreign organizations that develop plans to be resolved in a series of parts or “multiple points of entry,” given that the current proposal might rest on false assumptions; and
- In order to reduce market uncertainty, explore with fellow banking authorities domestically and internationally the possibility of rationalizing the treatment of certain debt instruments under the current regulatory capital requirements.
Read the full letter here:
Systemic Risk Council letter to Fed on total-loss absorbing capacity and long-term debt proposal