The Federal Reserve proposed a new set of requirements for the eight U.S. global systemically important banks to increase their total loss absorbing capacity, or TLAC, by at least 60%. The proposal would accomplish this by requiring banks to issue supplemental instruments that can be called upon should the company fail and need to be wound down rapidly.
Under the proposal, G-SIBs would be required to have outstanding minimum levels of long-term debt, convertible to equity during resolution to recapitalize the firm’s critical operations. The proposed debt requirement would complement existing regulatory capital to meet the required level of TLAC.
A domestic G-SIB would be required to have outstanding long-term debt amounting to at least 6% of risk-weighted assets (plus its Basel Committee-designated G-SIB surcharge) or 4.5% of its total leverage exposure, whichever is greater. A G-SIB’s TLAC amount would be either 18% of risk-weighted assets or 9.5% of its total leverage exposure, whichever is greater.
The Fed also proposed limitations on certain financial arrangements by the G-SIBs parent holding companies to facilitate an orderly resolution. It proposed slightly different long-term debt requirements and TLAC levels for U.S. operations of foreign banks with at least $50 billion in U.S. assets. Comments on the proposal are due Feb. 1, 2016.