Board of Governors of the Federal Reserve System

Thank you, Madam Chair. A key aim of post-crisis regulatory reform has been to address the too-big-to-fail problem. One part of this effort has been to increase substantially the resilience of systemically important banking organizations by strengthening capital requirements, introducing liquidity requirements, and conducting rigorous annual stress tests. The other part of this effort has been to make the failure of systemically important banks possible without either causing disorder in financial markets or requiring injections of government capital. This work has been conducted by our colleagues at the FDIC in developing strategies for the exercise of their statutory orderly liquidation authority, and jointly by our two agencies in requiring effective and realistic resolution planning by large banking organizations.

The current proposal builds on these undertakings. As staff will explain more fully in a moment, the core of the proposal is a requirement that the parent holding companies of systemically important U.S. banking firms maintain outstanding a substantial amount of unsecured long-term debt issued to unrelated investors. By making the failure of even the largest banks more manageable, the proposed regulation will be another important step in solving the too-big-to-fail problem.

The principal effect of the long-term debt requirement will be to increase the loss-absorbing capacity of a GSIB even after it has failed. This in turn should help reassure counterparties that, together, any remaining equity and the long-term debt will be able to absorb additional losses and recapitalize the operating subsidiaries of the failed firm. The proposed rule should also reduce run risk associated with short-term wholesale funding by mandating that firms have a more substantial base of stable funding that is structurally subordinated to funding at operating subsidiaries. Finally, because the holders of the mandated long-term debt will be on notice that they are truly subject to losses in the event of a resolution, the proposal should also improve market discipline.

The proposal also applies to the U.S. intermediate holding companies (IHCs) of foreign GSIBs. The IHCs, though, will be subject to an internal long-term debt requirement. That is, they will have to issue the debt to their foreign parents. By ensuring that U.S. operations of foreign banks will have their appropriate share of the loss-absorbing capacity of the foreign consolidated firm, the proposal will enhance prospects for orderly resolution of the foreign banks by their home jurisdiction authorities. But if, for any reason, that resolution is unsuccessful, the internal long-term debt will be available to U.S. authorities for orderly resolution and recapitalization of the IHCs.

Let me mention, in this regard, that we are close to completing an agreement with other home country regulators of GSIBs that will require all those firms to maintain a minimum level of total loss-absorbing capacity (TLAC). Achievement of this agreement will be a major accomplishment for U.S. regulators and our like-minded counterparts in other jurisdictions. This TLAC requirement is congruent with our long-term debt requirement, though it allows equity capital in excess of minimum regulatory requirements to help satisfy the requirement. The proposal before us today would include the TLAC requirement.

With that, let me turn to Mark Van Der Weide to lead the staff presentation.