Board of Governors of the Federal Reserve System

Today, the Board is considering two matters regarding the regulation of financial institutions. The first proposal, which I support publishing for comment with reservation, largely extends the current GSIB long-term debt requirement to all banks with more than $100 billion in assets. The second proposal, which I do not support, would publish resolution planning guidance for Category II and III firms. I have significant concerns with each proposal and encourage the public to submit comments on both proposals.

Long-term Debt Proposal
The first proposal would require large banks with more than $100 billion in assets to issue and maintain minimum amounts of long-term debt. The proposal would impose significant costs on firms without a clear articulation of benefits and may be duplicative of or overlapping with other pending regulatory proposals. As proposed, the new requirements would further erode the current risk-based, tailored regulatory framework. The proposal also lacks information that commenters may need to conduct an analysis of the costs and benefits of the proposal, because it would be implemented together with the Board's pending Basel III capital proposal. As published, the Basel III proposal would significantly increase capital requirements for the same banks, and the corresponding impact of this long-term debt proposal together with the increased capital requirements is unclear.¹ Finally, while today's proposal suggests that a long-term debt requirement could have produced a materially different outcome for the banks that failed earlier this year, the proposal offers little evidence or explanation to support this claim.

Lack of Tailoring and Effect on Competition
Today's proposal would weaken the current risk-based, tailored approach to regulation by applying the same regulatory requirements to firms from $100 billion to $1 trillion regardless of their activities and potential risks to the financial system. I am concerned that collapsing Categories II, III, and IV into a single prudential category may call into question whether the Federal Reserve is complying with the statutory requirements to tailor prudential requirements for large firms.² Flattening these standards could result in the need for large firms to grow through acquisition to achieve the necessary economies of scale to comply with increased regulatory requirements.

In my view, as the differences between the regulatory requirements for GSIBs and firms with more than $100 billion in assets continue to be eroded, it will become less economically rational for firms to remain in Category IV and creates an even steeper "cliff" effect for regional banks that seek to grow into this category. Ultimately, the cumulative effect of these proposals and others to be considered in the coming months could exacerbate the pressure on banks to grow larger through acquisition resulting in harmful effects on competition, the reduction of banking options in some geographic or product markets, and rendering some institutions competitively unviable.

I welcome and strongly encourage feedback from commenters on all aspects of this proposal, but particularly about the scope of the proposal's application. In 2017, when the rules addressing total loss-absorbing capacity and long-term debt for GSIBs and the U.S. intermediate holding companies of foreign GSIBs were adopted, the Board expressly noted that the application of the rules were limited, "in keeping with the Dodd-Frank Act's mandate that more stringent prudential standards be applied to the most systemically important bank holding companies."³ In my view, there is a legitimate question about whether the proposal meets the statutory bar for tailoring the stringency of enhanced prudential standards, and applying such standards to banks with $100 billion to $250 billion in assets. I look forward to receiving feedback from commenters on this issue.

Costs of the Proposal
The draft Federal Register notice describes the projected costs of this proposal as "moderate." In making this assertion, however, the impact analysis expressly ignores the effect of the proposed changes to capital rules, even though the outstanding Basel III proposal would materially increase capital requirements for these firms. In addition, these regulatory proposals would not operate independently of each other—increases in risk-based capital requirements would also increase long-term debt requirements.

Changes to both risk-based capital requirements and long-term debt requirements could significantly alter how banks are funded, the activities in which they engage, the products they offer, and the markets they serve, yet the proposal does not address these potential indirect costs. I am concerned that it will be challenging for commenters to understand and meaningfully comment on the proposal, specifically regarding the unintended costs associated with this proposal and the effects those costs could have on banks, their customers, and the economy.

Under the impact analysis provided, and independent of the increased Basel III capital requirements, the proposal would require large banks to have $250 billion in long-term debt outstanding, which staff estimates would require firms to issue an estimated additional $70 billion in long-term debt. Of this $70 billion in additional, incremental issuance, approximately $50 billion is required to be issued by Category IV institutions, those between $100 and $250 billion in assets.

The estimated annual funding costs associated with this proposal are also significant. As described in the proposal, the annual funding costs of implementation and compliance are estimated to be between $1.5 billion and $5.6 billion. I am concerned that these higher costs will be passed on to consumers and businesses without materially enhancing financial stability, the safe and sound operation of these firms, or improving the resolvability of these firms beyond a potentially smaller impact on the deposit insurance fund should an institution fail.

Other Considerations
Finally, today's proposal may give the impression that had long-term debt been in place at Silicon Valley Bank ("SVB"), Signature Bank, or First Republic Bank, it could have prevented the failure or mitigated the bank runs at these firms. In my view, there is little evidence that a long-term debt requirement would have prevented failure or prevented the bank runs. To be clear, this proposal does not address the identified weaknesses or supervisory shortcomings that actually led to the failures of SVB, Signature, or First Republic, and we should be cautious in using these bank failures as a rationale to justify a broad overhaul of the regulatory framework through a piecemeal approach amending individual regulations, particularly to the extent these efforts target other unrelated or tangentially related regulatory changes.⁴

Finally, it is imperative that we thoroughly understand the unintended consequences of our proposals and acknowledge the likely outcomes, including the balance of costs and benefits, to avoid imposing further overlapping and potentially duplicative regulatory requirements on these firms. Regulatory reform should not adopt a belt, suspenders, and elastic waistband approach for every problem, particularly when targeted reforms may address known deficiencies in a more efficient and less burdensome way.

I continue to believe that some targeted changes to supervision and regulation are warranted in light of the bank failures earlier this year.⁵ However, our focus should be on the core banking risks, including liquidity and interest rate risk, and shortcomings within the Federal Reserve's supervisory approach. Supervision and regulation must work together to effectively ensure safety and soundness of financial institutions. One cannot be successful without the benefit of the other.

Resolution Plan Guidance
The second proposal is intended to provide greater clarity about the agencies' expectations regarding resolution planning for domestic and foreign Category II and III financial institutions. I agree that providing greater clarity around regulatory expectations for firms' resolution plans could reduce the burden on firms and improve the quality of resolution plan submissions.

However, I would like to better understand whether the guidance provides sufficient detail about the agencies' expectations, and I encourage commenters to address this issue. For example, the guidance contemplates that these firms should include a least-cost resolution analysis in their resolution plans. Is there sufficient information available to financial institutions to effectively evaluate whether a proposed resolution plan would satisfy this test? If the agencies expect firms to demonstrate compliance with opaque concepts like the least-cost test, more information about the test and how the FDIC applies this test should be available to firms subject to the guidance. I look forward to receiving comments on this area of the guidance.

Further, while improving transparency around supervisory expectations is a worthy goal, I am concerned that the parallel consideration of the long-term debt and Basel III proposals will complicate the achievement of this goal. Since each of these rulemaking proposals may impact firms' resolution strategies, it might be more effective to delay publication of the resolution planning guidance until the pending proposals are finalized. Although the guidance suggests that it is not intended to favor either the "single point of entry" or "multiple point of entry" resolution strategy, ongoing regulatory reform efforts could effectively eliminate this optionality. If the agencies expect firms to adopt a particular resolution strategy, it would be preferable to make that clear in the guidance.

Conclusion
I look forward to reviewing comments on today's proposals, but I continue to be concerned that these proposals are more evidence of unfortunate trends in the approach of the prudential bank regulatory agency rulemaking process.

Specifically, in evaluating the costs and benefits, I am concerned that the impact analysis potentially minimizes or understates the costs of regulatory changes, while overstating the benefits. The challenge of providing a meaningful impact analysis is exacerbated when, as in this case, there are multiple, interrelated proposals outstanding, and many more under development. This overlap and uncertainty make it difficult to analyze and evaluate the cumulative effect and merit of these proposals. While it is important for the ongoing regulatory reform agenda to include necessary, targeted improvements to address known deficiencies, a broad-based erosion of tailoring would be an inefficient and unnecessary way to accomplish this objective.

Agency rulemaking is more credible and effective when it is conducted in an open and collaborative manner with sufficient time to provide comment, particularly given the extremely complex nature of these proposals and the ambitious regulatory agenda. As we encourage public comment in the regulatory process, we should also recognize that proposing individual changes to a number of regulations—regulations that may interact with each other or seek to achieve similar policy goals—may frustrate the public's ability to provide input, particularly when the public may not be able to anticipate the cumulative effects of these proposals.

1. Regulatory capital rule: Amendments applicable to large banking organizations and to banking organizations with significant trading activities. (PDF). Return to text

2. See 12 U.S.C. § 5365(a)(1), (2)(C). Return to text

3. See Board of Governors of the Federal Reserve System, "Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important U.S. Bank Holding Companies and Intermediate Holding Companies of Systemically Important Foreign Banking Organizations," 82 Fed. Reg. 8266, 8288 (January 24, 2017); 12 U.S.C. § 5365(a)(1)(B). Return to text

4. See Considerations for Revisions to the Bank Regulatory Framework, May 19, 2023. Return to text

5. Responsive and Responsible Bank Regulation and Supervision, June 25, 2023. Return to text