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Fed Finalizes the Final Elements of the Post-Crisis Regulatory Framework

Finalizing one of its last remaining post-financial crisis efforts to improve bank resiliency and avoid tax-payer funded bailouts, the Federal Reserve has approved new capitalization requirements for the largest domestic and foreign banks operating in the U.S.

These institutions will be required to meet a new long-term debt mandate and a new “Total Loss-Absorbing Capacity” (TLAC) requirement. The final rule applies to domestic firms identified as Global Systemically Important Banks (GSIBs) and to the U.S. operations of foreign GSIBs. To reduce the systemic impact of the failure of a GSIB, a bankruptcy or statutory orderly resolution process imposes the losses of a failed GSIB on investors rather than taxpayers as the critical operations of the firm continue to function. Requiring a GSIB to maintain sufficient amounts of long-term debt, which can be converted to equity during resolution, would help achieve this objective by providing a source of private capital to support the firm's critical operations during resolution.

Like the proposal issued in October 2015, the final rule establishes a minimum level of long-term debt for domestic GSIBs and the U.S. operations of foreign GSIBs that could be used to recapitalize the critical operations of the firms upon failure. The complementary TLAC requirement will set a new minimum level of total loss-absorbing capacity, which can be met with both regulatory capital and long-term debt.  These requirements will improve the prospects for the orderly resolution of a failed GSIB and will strengthen the resiliency of all GSIBs. The final rule also will require the parent holding company of a domestic GSIB to avoid entering into certain financial arrangements that would create obstacles to an orderly resolution. These "clean holding company" requirements will include bans on issuance of short-term debt to external investors and on entering into derivatives and certain other types of financial contracts with external counterparties.

News Characteristics

Date : Dec 15, 2016
Region : North America
Industry : Banks
Function : Regulation and Compliance
Sub-Function : Regulatory changes