Board of Governors of the Federal Reserve System

Today's final rule helps to ensure that the largest and most complex banking institutions in America can be resolved without posing unacceptable risks to financial stability. The long-term debt requirement contained in the rule is a necessary counterpart to the Dodd-Frank Act requirement that firms construct credible plans to resolve themselves without endangering the stability of the financial system.

A sufficiently large cushion of long-term debt issued by the bank holding company that can be used to fully recapitalize a firm's important subsidiaries in the event of bankruptcy is essential for the orderly resolution of large complex banking institutions. As with the capital surcharge for global systemically important banks (GSIBs), our rule is risk-sensitive so that the amount of long-term debt required will increase with the size and complexity of the banking institution's activities. More systemically important financial institutions will be required to hold more long-term debt, thus reinforcing incentives to reduce their systemic footprints.

The availability of sufficient long-term debt at the parent to both absorb losses and recapitalize the critical operating subsidiaries is imperative to mitigate fire sales and destructive runs by providing reassurance to depositors, short-term debt holders, and counterparties of the firm, since the long-term unsecured debt issued by the parent holding company is structurally subordinate to the claims on the operating subsidiaries. By requiring that the long-term debtholders of the large banking institution will be effectively "bailed in," and the resources will be sufficient to recapitalize the firm, this rule helps prevent any future taxpayer bailout.

In response to comments received, today's final rule contains modifications relative to the initially proposed rule that reduce the cost of compliance, while achieving the core objective. In particular, given that nearly all outstanding long-term debt issued by bank holding companies subject to the rule includes options for the bondholder under certain circumstances to demand more rapid repayment, so-called acceleration clauses, the rule allows such debt issued prior to the end of this year to count as qualifying long-term debt. However, to provide incentives for firms to issue debt without impermissible acceleration clauses going forward, any such debt issued after this year will not qualify. In addition, whereas in the proposed rule, foreign bank intermediate holding companies (IHCs) were only allowed to count long-term debt issued to their foreign company parent as qualifying under the rule, today's final rule allows IHCs to count long-term debt issued to third parties in those cases where the parent plans to resolve the IHC should it become insolvent. Both changes should significantly reduce the burden of compliance without compromising the requirement that banks hold sufficient amounts of long-term debt to enable recapitalization in the event of insolvency.

Today's long-term debt requirement, together with rigorous resolution planning and preparedness, the GSIB surcharge, capital stress tests, and liquidity requirements, will decrease substantially the risk that a large financial institution's distress could pose to the broader financial system and help ensure that no banking institution is too large and too complex to fail. Today's rule moves us closer to our goal of a safer, more responsible, and more resilient financial system.