Long-Term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions

Federal RegisterSep 19, 2023

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 3 and 54

[Docket ID OCC-2023-0011]

RIN 1557-AF21

FEDERAL RESERVE SYSTEM

12 CFR Parts 216, 217, 238, and 252

[Regulations P, Q, LL, and YY; Docket No. [R-1815]]

RIN 7100-AG66

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 324 and 374

RIN 3064-AF86

Long-Term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions

AGENCY:

Office of the Comptroller of the Currency, Department of the Treasury; Board of Governors of the Federal Reserve System; and Federal Deposit Insurance Corporation.

ACTION:

Notice of proposed rulemaking with request for public comment.

SUMMARY:

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation are issuing a proposed rule for comment that would require certain large depository institution holding companies, U.S. intermediate holding companies of foreign banking organizations, and certain insured depository institutions, to issue and maintain outstanding a minimum amount of long-term debt. The proposed rule would improve the resolvability of these banking organizations in case of failure, may reduce costs to the Deposit Insurance Fund, and mitigate financial stability and contagion risks by reducing the risk of loss to uninsured depositors.

DATES:

Comments must be received on or before November 30, 2023.

ADDRESSES:

Comments should be directed to:

OCC:

You may submit comments to the OCC by any of the methods set forth below. Commenters are encouraged to submit comments through the Federal eRulemaking Portal. Please use the title “Long-term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions” to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods:

•

Federal eRulemaking Portal—Regulations.gov:

Go to

https://regulations.gov/

. Enter “Docket ID OCC-2023-0011” in the Search Box and click “Search.” Public comments can be submitted via the “Comment” box below the displayed document information or by clicking on the document title and then clicking the “Comment” box on the top-left side of the screen. For help with submitting effective comments, please click on “Commenter's Checklist.” For assistance with the

Regulations.gov

site, please call 1-866-498-2945 (toll free) Monday-Friday, 9 a.m.-5 p.m. ET, or email

regulationshelpdesk@gsa.gov

•

Mail:

Chief Counsel's Office, Attention: Comment Processing, Office of the Comptroller of the Currency, 400 7th Street SW, Suite 3E-218, Washington, DC 20219.

•

Hand Delivery/Courier:

400 7th Street SW, Suite 3E-218, Washington, DC 20219.

Instructions:

You must include “OCC” as the agency name and “Docket ID OCC-2023-0011” in your comment. In general, the OCC will enter all comments received into the docket and publish the comments on the

Regulations.gov

website without change, including any business or personal information provided such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not include any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.

You may review comments and other related materials that pertain to this action by the following method:

•

Viewing Comments Electronically—Regulations.gov:

Go to

https://regulations.gov/

. Enter “Docket ID OCC-2023-0011” in the Search Box and click “Search.” Click on the “Dockets” tab and then the document's title. After clicking the document's title, click the “Browse All Comments” tab. Comments can be viewed and filtered by clicking on the “Sort By” drop-down on the right side of the screen or the “Refine Comments Results” options on the left side of the screen. Supporting materials can be viewed by clicking on the “Browse Documents” tab. Click on the “Sort By” drop-down on the right side of the screen or the “Refine Results” options on the left side of the screen checking the “Supporting & Related Material” checkbox. For assistance with the

Regulations.gov

site, please call 1-866-498-2945 (toll free) Monday-Friday, 9 a.m.-5 p.m. ET, or email

regulationshelpdesk@gsa.gov

The docket may be viewed after the close of the comment period in the same manner as during the comment period.

Board:

You may submit comments to the Board, identified by Docket No. R-1815 and RIN 7100-AG66, by any of the following methods:

•

Agency Website: http://www.federalreserve.gov

. Follow the instructions for submitting comments at

http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm

•

Federal eRulemaking Portal: http://www.regulations.gov

. Follow the instructions for submitting comments.

•

Email: regs.comments@federalreserve.gov

. Include docket number and RIN in the subject line of the message.

•

Fax:

(202) 452-3819 or (202) 452-3102.

•

Mail:

Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551. In general, all public comments will be made available on the Board's website at

www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm

as submitted, and will not be modified to remove confidential, contact or any identifiable information. Public comments may also be viewed electronically or in paper in Room M-4365A, 2001 C St. NW Washington, DC 20551, between 9:00 a.m. and 5:00 p.m. during federal business weekdays.

FDIC:

You may submit comments to the FDIC, identified by RIN 3064-AF86, by any of the following methods:

•

Agency Website: https://www.fdic.gov/resources/regulations/federal-register-publications/

. Follow instructions for submitting comments on the FDIC website.

•

Mail:

James P. Sheesley, Assistant Executive Secretary, Attention: Comments/Legal OES (RIN 3064-AF86), Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

•

Hand Delivered/Courier:

Comments may be hand-delivered to the guard station at the rear of the 550 17th Street NW building (located on F Street NW) on business days between 7 a.m. and 5 p.m.

•

Email: comments@FDIC.gov

. Include RIN 3064-AF86 on the subject line of the message.

•

Public Inspection:

Comments received, including any personal information provided, may be posted without change to

https://www.fdic.gov/resources/regulations/federal-register-publications/

. Commenters should submit only information that the commenter wishes to make available publicly. The FDIC may review, redact, or refrain from posting all or any portion of any comment that it may deem to be inappropriate for publication, such as irrelevant or obscene material. The FDIC may post only a single representative example of identical or substantially identical comments, and in such cases will generally identify the number of identical or substantially identical comments represented by the posted example. All comments that have been redacted, as well as those that have not been posted, that contain comments on the merits of this notice will be retained in the public comment file and will be considered as required under all applicable laws. All comments may be accessible under the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT:

OCC:

Andrew Tschirhart, Risk Expert, Capital and Regulatory Policy, (202) 649-6370; or Carl Kaminski, Assistant Director, or Joanne Phillips, Counsel, Chief Counsel's Office, (202) 649-5490, Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219. If you are deaf, hard of hearing, or have a speech disability, please dial 7-1-1 to access telecommunications relay services.

Board:

Molly Mahar, Senior Associate Director, (202) 973-7360, Juan Climent, Assistant Director, (202) 872-7526, Francis Kuo, Lead Financial Institution Policy Analyst (202) 530-6224, Lesley Chao, Lead Financial Institution Policy Analyst, (202) 974-7063, Tudor Rus, Lead Financial Institution Policy Analyst, (202) 475-6359, Lars Arnesen, Senior Financial Institution Policy Analyst, (202) 452-2030, Division of Supervision and Regulation; or Charles Gray, Deputy General Counsel, (202) 872-7589, Reena Sahni, Associate General Counsel, (202) 452-3236, Jay Schwarz, Assistant General Counsel, (202) 452-2970, Josh Strazanac, Counsel, (202) 452-2457, Brian Kesten, Senior Attorney, (202) 475-6650, Jacob Fraley, Legal Assistant/Attorney, (202) 452-3127, Legal Division; For users text telephone systems (TTY) or any TTY-based Telecommunications Relay Services, please call 711 from any telephone, anywhere in the United States; Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551.

FDIC:

Andrew J. Felton, Deputy Director, (202) 898-3691; Ryan P. Tetrick, Deputy Director, (202) 898-7028; Elizabeth Falloon, Senior Advisor, (202) 898-6626; Jenny G. Traille, Acting Senior Deputy Director, (202) 898-3608; Julia E. Paris, Senior Cross-Border Specialist, (202) 898-3821; Division of Complex Institution Supervision and Resolution; R. Penfield Starke, Acting Deputy General Counsel,

rstarke@fdic.gov;

David Wall, Assistant General Counsel, (202) 898-6575; F. Angus Tarpley III, Counsel, (202) 898-8521; Dena S. Kessler, Counsel, (202) 898-3833, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction and Overview of the Proposal

A. Background and Introduction

B. Overview of the Proposal

II. Advance Notice of Proposed Rulemaking

III. LTD Requirement for Covered Entities

A. Scope of Application

B. Covered Savings and Loan Holding Companies

C. Calibration of Covered Entity LTD Requirement

IV. LTD Requirement for Covered IDIs

A. Scope of Application

B. Calibration of Covered IDI LTD Requirement

V. Features of Eligible LTD

A. Eligible External LTD

B. Eligible Internal LTD

C. Special Considerations for Covered IHCs

D. Legacy External LTD Counted Towards Requirements

VI. Clean Holding Company Requirements

A. No External Issuance of Short-Term Debt Instruments

B. Qualified Financial Contracts With Third Parties

C. Guarantees That are Subject to Cross-Defaults

D. Upstream Guarantees and Offset Rights

E. Cap on Certain Liabilities

VII. Deduction of Investments in Eligible External LTD From Regulatory Capital

VIII. Transition Periods

IX. Changes to the Board's TLAC rule

A. Haircut for LTD Used to Meet TLAC Requirement

B. Minimum Denominations for LTD Used to Satisfy TLAC Requirements

C. Treatment of Certain Transactions for Clean Holding Company Requirements

D. Disclosure Templates for TLAC HCs

E. Reservation of Authority

F. Technical Changes To Accommodate New Requirements

X. Economic Impact Assessment

A. Introduction and Scope of Application

B. Benefits

C. Costs

XI. Regulatory Analysis

A. Paperwork Reduction Act

B. Regulatory Flexibility Act

C. Riegle Community Development and Regulatory Improvement Act of 1994

D. Solicitation of Comments on the use of Plain Language

E. OCC Unfunded Mandates Reform Act of 1995 determination

F. Providing Accountability Through Transparency Act of 2023

I. Introduction and Overview of the Proposal

A. Background and Introduction

Following the 2008 financial crisis, the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), and Federal Deposit Insurance Corporation (FDIC and, together with the OCC and the Board, the “agencies”) adopted rules and guidance, both jointly and individually, to improve the resolvability, resilience, and safety and soundness of all banking organizations. The agencies have continued to evaluate whether existing regulations are appropriate to address evolving risks. In recent years, certain banking organizations that are not global systemically important banking organizations (GSIBs) have grown in size and complexity, and new vulnerabilities have emerged, such as increased reliance on uninsured deposits. In light of these trends, the Board and the FDIC issued an advance notice of proposed rulemaking (ANPR) in October 2022 seeking public input on whether a long-term debt requirement was appropriate to address the financial stability risk associated with the material distress or failure of certain non-GSIB large banking organizations.

More recently, the insured depository institutions (IDIs) of certain non-GSIB banking organizations with consolidated assets of $100 billion or more experienced significant withdrawals of uninsured deposits in response to underlying weaknesses in their financial position, precipitating their failures. These events have further highlighted the risk that the failure of one of these banking organizations can spread to other financial institutions and potentially give rise to systemic risk. Moreover, these recent IDI failures have resulted in significant costs to the FDIC's Deposit Insurance Fund (DIF).

See

Resolution-Related Resource Requirements for Large Banking Organizations, 87 FR 64170 (Oct. 24, 2022),

https://www.federalregister.gov/documents/2022/10/24/2022-23003/resolution-related-resource-requirements-for-large-banking-organizations

To address these risks, the Board is proposing to require Category II, III, and IV bank holding companies (BHCs) and

savings and loan holding companies (SLHCs and, together with BHCs, “covered HCs”), and Category II, III, and IV U.S. intermediate holding companies (IHCs) of foreign banking organizations (FBOs) that are not GSIBs (“covered IHCs” and, together with covered HCs, “covered entities”) to issue and maintain minimum amounts of long-term debt (LTD) that satisfies certain requirements. The agencies also are proposing to require IDIs that are not consolidated subsidiaries of U.S. GSIBs and that (i) have at least $100 billion in consolidated assets or (ii) are affiliated with IDIs that have at least $100 billion in consolidated assets (covered IDIs) to issue and maintain minimum amounts of LTD.

Under the proposal, covered IDIs that are consolidated subsidiaries of covered entities would be required to issue the LTD internally to a company that consolidates the covered IDI, which would in turn be required to purchase that LTD. Covered IDIs that are not consolidated subsidiaries of covered entities would be permitted (and where there is no controlling parent, required) to issue their LTD externally to nonaffiliates. Under the proposal, only debt instruments that are most readily able to absorb losses in a resolution proceeding would qualify as eligible LTD. Therefore, the agencies believe the proposal would improve the resolvability of covered entities and covered IDIs.

IDIs that are consolidated subsidiaries of U.S. GSIBs would not be subject to the proposed LTD requirement because their parent holding companies are subject to the LTD requirement under the Board's total loss-absorbing capacity (TLAC) rule.

See

12 CFR 252 subparts G and P. In addition, U.S. GSIBs are subject to the most stringent capital, liquidity, and other prudential standards in the United States. These firms also have adopted resolution plans reflecting guidance issued by the Board and the FDIC which establishes a capital and liquidity framework for resolution. The guidance (including the provisions related to Resolution Capital Adequacy and Positioning, or RCAP) is designed to ensure adequate maintenance of loss-absorbing resources either at the parent or at material subsidiaries such that all material subsidiaries, including IDIs, could be recapitalized in the event of resolution under the single point of entry resolution strategies adopted by the U.S. GSIBs.

See

Guidance for § 165(d) Resolution Plan Submissions by Domestic Covered Companies applicable to the Eight Largest, Complex U.S. Banking Organizations, 84 FR 1438 (Feb. 4, 2019),

https://www.federalregister.gov/documents/2019/02/04/2019-00800/final-guidance-for-the-2019

By augmenting loss-absorbing capacity, LTD can provide banking organizations and banking regulators greater flexibility in responding to the failure of covered entities and covered IDIs. In the resolution of a failed IDI, the availability of an outstanding amount of LTD may increase the likelihood of an orderly and cost-effective resolution for the IDI and may help minimize costs to the DIF. Even where the amount of outstanding LTD is insufficient to absorb enough losses so that all depositor claims at the IDI can be fully satisfied, it would reduce potential costs to the DIF and may expand the range of options available to the FDIC as receiver. In addition, the proposed LTD requirement could improve the resilience of covered entities and covered IDIs by enhancing the stability of their funding profiles. Investors in LTD could also exercise market discipline over issuers of LTD.

1. Risks Presented by Covered Entities and Covered IDIs, and Challenges in Resolution

Covered entities today primarily operate a bank-centric business model, with deposits providing the main source of their funding.

Following the 2008 financial crisis, the reliance of covered entities on uninsured deposits grew dramatically.

This increased reliance on uninsured deposit funding has given rise to vulnerabilities at these banking organizations.

According to FR Y-9C and Call Report data as of December 31, 2022, for domestic Category II, III and IV BHCs and SLHCs with more than $100 billion in total assets, excluding U.S. GSIBs and grandfathered unitary SLHCs, deposits account for approximately 82 percent of total liabilities. Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank, Table 1 (Apr. 2023) (SVB Report),

https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf

. Comparatively, across the U.S. GSIBs, deposits account for approximately 54 percent of total liabilities.

Data from Call Reports show that the proportion of uninsured deposits to total deposits at covered entities increased from about 31 percent to 43 percent from 2009 to 2022.

As recent events have highlighted, high levels of uninsured deposit funding can pose an especially significant risk of bank runs when customers grow concerned over the solvency of their bank. The failure of covered entities or covered IDIs can also spread to a broader range of banking organizations, impacting the provision of financial services and access to credit for individuals, families, and businesses. FDIC research shows that account holders with uninsured deposits are more sensitive to negative news regarding the stability of their banks and are more likely to withdraw funds to protect themselves than those holding only insured deposits.

The sensitivity of uninsured depositors to information flows has been amplified by social media, potentially further shortening the timeline between a banking organization experiencing a negative news event and being faced with a potential deposit run. This can, in turn, bring about the rapid failure of a covered entity, forcing its IDI subsidiary into an FDIC receivership with little runway for recovery steps to be implemented or for contingency planning for resolution. The speed at which stress occurs has the potential to cause contagion to other institutions perceived to be similarly situated.

See

FDIC, Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance (last updated July 15, 2022),

https://www.fdic.gov/analysis/cfr/working-papers/2018/cfr-wp2018-02-update.pdf

Among covered entities that are subject to resolution planning requirements under Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), most indicate that their preferred resolution strategy involves the resolution of their IDI subsidiaries under the Federal Deposit Insurance Act of 1950, as amended (FDI Act), with the covered entities being resolved under Chapter 11 of the U.S. Bankruptcy Code. In the resolution of an IDI under the FDI Act, the FDIC as receiver has a variety of strategic options, including, among others, selling the IDI's assets and transferring its deposit liabilities to one or more healthy acquirers, transferring the IDI's assets and deposit liabilities to a bridge depository institution, or executing an insured deposit payout and liquidation of the assets of the failed bank. Many covered entities focus in their resolution plans on a bridge strategy where the FDIC transfers the assets and deposit liabilities of a failed IDI to a newly organized bridge depository institution that the FDIC continues to operate. This resolution option can allow the FDIC to effectively stabilize the operations of the failed IDI and preserve the failed IDI's franchise value, making the business of the failed IDI or its separate business lines more attractive to a greater number of potential acquirers.

The FDIC is required by section 13(c) of the FDI Act to resolve an IDI in a manner that poses the least cost to the DIF.

Depending on the losses incurred at an IDI and on the liability structure of the IDI, the FDIC could be required to impose losses on the IDI's uninsured depositors in order to satisfy the least-cost requirement, unless the systemic risk exception is invoked.

As recent

experiences have demonstrated, if uninsured depositors believe they might lose a portion of their deposit funds or they might encounter interrupted access to such funds, contagion can spread to other institutions and cause deposit runs beyond those at the failing IDI.

See

12 U.S.C. 1823(c)(4).

Invocation of the systemic risk exception allows the FDIC to take actions that could be inconsistent with the least-cost requirement in the FDI Act. The systemic risk exception determination can only be made by the Secretary of the Treasury, in consultation with the President, and with the recommendation of two-thirds of the boards of the Board and the FDIC, upon a determination that compliance with the least-cost requirement would have serious adverse effects on economic

conditions or financial stability. 12 U.S.C. 1823(c)(4)(G).

The recent failures of three IDIs that would have been covered within the scope of this proposal, Silicon Valley Bank (SVB), Signature Bank (SBNY), and First Republic Bank (First Republic), highlighted the risks posed by the failure of a covered IDI, including systemic contagion, as well as the challenges that the FDIC can face in executing an orderly resolution for covered IDIs. The comparative absence of alternate forms of stable funding in these cases, other than equity and deposits, increased these banks' vulnerability to deposit runs, and these runs precipitated their failures. Despite prompt action taken by regulators to facilitate the resolution of these failed IDIs, there was contagion in the banking sector, particularly for certain covered entities and certain regional banking organizations,

some of which experienced higher than normal deposit outflows during this time.

The proposed rule, if fully implemented at the time of the failure of these firms, would have provided billions of dollars of additional loss-absorbing capacity. The agencies believe that the presence of a substantial layer of liabilities that absorbs losses ahead of uninsured depositors could have reduced the likelihood of those depositors running, might have facilitated resolution options that were not otherwise available and could have made systemic risk determinations unnecessary.

Regional banking organizations generally are considered those with total consolidated assets between $10 billion and $100 billion.

See, e.g.,

SVB Report.

See

GAO, Preliminary Review of Agency Actions Related to March 2023 Bank Failures at 32 (Apr. 28, 2023),

https://www.gao.gov/assets/gao-23-106736.pdf

2. Key Benefits and Rationale of the Proposal

The proposed LTD requirements would improve the resolvability of covered entities and covered IDIs because LTD can be used to absorb loss and create equity in resolution. In particular, because LTD is subordinate to deposits and can be used by the FDIC to absorb losses by leaving it behind in the receivership estate of a failed IDI, it can help mitigate the risk that any depositors would take losses in the resolution of the IDI. Because LTD absorbs losses before deposits, an LTD requirement at the covered IDI would give the FDIC greater flexibility, including the potential to transfer all deposit liabilities (including uninsured deposit liabilities) of a failed IDI to an acquirer or to a bridge depository institution in a manner consistent with the FDI Act's least-cost requirement.

Expanding the FDIC's range of options for resolving a failed IDI to potentially include the use of a bridge depository institution that can assume all deposits on a least-cost basis can significantly improve the prospect of an orderly resolution. When an IDI fails quickly, a bridge depository institution might afford the FDIC additional time to find an acquirer for the IDI's assets and deposits. Transfer of deposits and assets to a bridge depository institution may also give the FDIC additional time to execute a variety of resolution strategies, such as selling the IDI in pieces over time or effectuating a spin-off of all or parts of the IDI's operations or business lines. LTD can therefore reduce costs to the DIF and expand the available resolution options if a bank fails. The availability of LTD would also improve the FDIC's options for resolving a failed IDI by maintaining franchise value, improving the marketability of the failed IDI, and reducing the need to use DIF resources to stabilize the institution or support a purchaser. Further, the availability of LTD could enable strategies involving bridge depository institutions to meet the least-cost test. The availability of LTD resources would also potentially support resolution strategies that involve a recapitalized bridge depository institution exiting from resolution on an independent basis as a newly-chartered IDI that would have new ownership. This may be particularly important in circumstances where there are market or other limitations that preclude finding a suitable acquirer, and where other options, such as liquidation, are not feasible or involve unacceptable levels of systemic risk. Further, there may be a limited market for the covered IDIs subject to this proposal due to their size and, in some cases, relatively more specialized business models. As a result, at the time of resolution, strategies that involve the sale of large IDIs may be limited due to market or other barriers, or may involve high costs in order to make a sale attractive and feasible for an acquirer, especially taking into account post-acquisition capital requirements. The availability of LTD to absorb losses or to recapitalize a failed IDI through the resolution process could also mitigate the impact of a covered IDI's failure on financial stability by reducing the risk to uninsured depositors, thereby reducing the risk of runs and contagion. LTD can therefore reduce costs to the DIF and expand the available resolution options if a bank fails.

Although the primary benefits of LTD relate to the resolution of covered entities and their covered IDI subsidiaries, LTD can also improve the resiliency of these banking organizations prior to failure. Considering its long maturity, LTD would be a stable source of funding and, in contrast to other forms of funding like uninsured deposits, may serve as a source of market discipline through pricing.

B. Overview of the Proposal

The agencies are inviting comment on this notice of proposed rulemaking to improve the resolvability of covered entities and covered IDIs. The proposal includes five key components.

First, the proposal would require Category II, III, and IV covered entities to issue and maintain outstanding minimum levels of eligible LTD. This aspect of the proposal is being issued solely by the Board.

The proposal would also require covered entities to purchase the debt of their subsidiaries that are internally issuing IDIs under the proposal.

Second, the proposal would require covered IDIs to issue and maintain outstanding a minimum amount of eligible LTD.

This aspect of the proposal is being issued by all of the agencies. A covered IDI that is a consolidated subsidiary of a covered entity or a foreign GSIB IHC would be required to issue eligible LTD internally to an entity that directly or indirectly consolidates the covered IDI.

A covered IDI that is not a controlled subsidiary of a further parent entity would be required to issue eligible LTD to investors that are not affiliates. A covered IDI that is a consolidated subsidiary of a further parent entity that

is not a covered entity or that is a controlled but not consolidated subsidiary of a covered entity or a foreign GSIB IHC would be permitted to issue eligible LTD to a company that controls the covered IDI or to investors that are not affiliates.

The IDI requirement would apply to an IDI of a U.S. IHC regardless of whether the U.S. IHC is subject to the Board's TLAC rule, provided the IDI meets the other requirements for applicability.

See

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 FR 8266 (Jan. 24, 2017),

https://www.federalregister.gov/documents/2017/01/24/2017-00431/total-loss-absorbing-capacity-long-term-debt-and-clean-holding-company-requirements-for-systemically.

A subsidiary is considered a consolidated subsidiary based on U.S. generally accepted accounting principles (GAAP); consolidation generally applies when its holding company controls a majority (greater than 50 percent) of the outstanding voting interests.

Third, the operations of covered entities would be subject to “clean holding company” requirements to further improve the resolvability of covered entities and their operating subsidiaries. This aspect of the proposal is being issued solely by the Board. In particular, the proposal would prohibit covered entities from issuing short-term debt instruments to third parties, entering into qualified financial contracts (QFCs) with third parties, having liabilities that are subject to “upstream guarantees”

or that are subject to contractual offset against amounts owed to subsidiaries of the covered entity. The proposal would also cap the amount of a covered entity's liabilities that are not LTD and that rank at either the same priority as or junior to its eligible external LTD at 5 percent of the sum of the covered entity's common equity tier 1 capital, additional tier 1 capital, and eligible LTD amount.

Upstream guarantees are when a parent company's obligations are guaranteed by one of its subsidiaries.

Fourth, to limit the potential for financial sector contagion due to interconnectivity in the event of the failure of a covered entity or covered IDI, the proposed rule would expand the existing capital deduction framework for LTD issued by U.S. GSIBs and the IHCs of foreign GSIBs to include external LTD issued by covered entities and external LTD issued by covered IDIs. This aspect of the proposal is being issued by all of the agencies.

Finally, the proposal would make certain technical changes to the existing TLAC rule that applies to the U.S. GSIBs and U.S. IHCs of foreign GSIBs. This aspect of the proposal is being issued solely by the Board. These changes would harmonize provisions within the TLAC rule and address items that have been identified through the Board's administration of the rule.

The revisions introduced by the proposal would interact with the agencies' capital rule and proposed amendments to those rules.

On July 27, 2023, the agencies issued a notice of proposed rulemaking inviting comment on a proposal to amend the capital rule.

See

Joint press release: Agencies request comment on proposed rules to strengthen capital requirements for large banks (July 27, 2023),

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230727a.htm.

Question 1: The agencies invite comment on the implications of the interaction of the proposal with other existing rules and with other notices of proposed rulemaking. How do proposed changes to the agencies' capital rule affect the advantages and disadvantages of this proposed rule?

II. Advance Notice of Proposed Rulemaking

In October 2022, the Board and the FDIC published an ANPR to solicit public input regarding whether an extra layer of loss-absorbing capacity could improve optionality in resolving certain large banking organizations and their subsidiary IDIs, and the costs and benefits of such a requirement.

The Board and the FDIC received nearly 80 comments on the ANPR from banking organizations, trade associations, public interest advocacy groups, members of Congress, and private individuals. Two members of the Senate Banking Committee as well as an advocacy group representing independent banks supported the proposal. Most commenters opposed or raised concerns regarding the proposal. However, most of the comments were received prior to the recent bank stress events involving SVB, SBNY, and First Republic and therefore did not take those events into consideration.

Resolution-Related Resource Requirements for Large Banking Organizations, 87 FR 64170 (Oct. 24, 2022),

https://www.federalregister.gov/documents/2022/10/24/2022-23003/resolution-related-resource-requirements-for-large-banking-organizations.

Many commenters asserted that an LTD requirement for covered entities and covered IDIs is unnecessary and that most covered entities and covered IDIs are prepared for orderly resolution pursuant to their existing resolution plans submitted to the FDIC and the Board. Specifically, commenters argued that covered entities are better capitalized and have stronger liquidity positions under post-crisis regulations, and that covered entities are non-complex and present minimal systemic risk. The commenters also maintained that recent balance sheet growth at covered entities is not concerning because such growth has involved increases in mostly low-risk, liquid assets. Further, commenters asserted that the resolution plans that have been submitted to the agencies by the covered entities and covered IDIs subject to such requirements are effective and already provide for optionality in resolution. The commenters argued that the imposition of a uniform LTD requirement would be inappropriate for the multiple point of entry (MPOE) resolution strategies followed by certain covered entities and could require covered entities to unnecessarily change their established resolution plans. Commenters also argued that anticipated stronger capital requirements that would be imposed pursuant to the anticipated Basel III finalization reforms would further diminish the need for an LTD requirement.

Multiple commenters, while supporting the spirit of the policy options raised in the ANPR, suggested the agencies should raise equity capital requirements rather than impose an LTD requirement to improve the resiliency of covered entities. Alternatively, some commenters argued that covered entities should be able to count any equity capital in excess of regulatory minimums toward any LTD requirement.

Several commenters argued that the benefits of an LTD requirement for covered entities would not outweigh its immediate costs. These commenters asserted that an excessive LTD requirement could decrease the availability of credit to businesses and consumers. Further, a few commenters suggested that an LTD requirement could imply uninsured depositor protection for IDIs subject to such a requirement, thereby increasing moral hazard. Several commenters stressed that any LTD requirement should be supported by a rigorous cost-benefit analysis.

Finally, several commenters questioned whether the Board possesses the statutory authority to impose an LTD requirement on BHCs under section 165(b) of the Dodd-Frank Act, as amended.

These commenters argued that the Board's authority under section 165 to issue enhanced prudential standards is limited to addressing financial stability risks. Commenters stated that covered entities do not pose a threat to financial stability and it is uncertain whether section 165(b) supports imposing an LTD requirement on covered entities.

Public Law 111-203; 124 Stat. 1376 (2010), codified at 12 U.S.C. 5365(b).

The agencies considered these comments in developing the proposed rule. In light of recent experiences with SVB, SBNY, and First Republic, the agencies are extending the scope of the proposed rule to large banking organization with total consolidated assets of $100 billion or more to reduce the likelihood of contagion from these banking organizations and to reduce the cost to the DIF should they fail. The agencies further note that both equity capital and LTD can be used to absorb losses and reduce the potential impact

from the failure of a large banking organization; unlike equity capital, however, LTD can always be used as a fresh source of capital subsequent to failure and can afford the FDIC more options in resolving a failed bank.

III. LTD Requirement for Covered Entities

A. Scope of Application

The proposed rule would apply to Category II, III, and IV U.S. BHCs and SLHCs, and Category II, III, and IV U.S. IHCs of FBOs that are not currently subject to the existing TLAC rule as defined under the Board's Regulations LL and YY (covered entities).

Under Regulations LL and YY, a Category II covered entity is one that has (i) at least $700 billion or more in average total consolidated assets, or (ii) at least $100 billion in average total consolidated assets and $75 billion or more in average cross-jurisdictional activity.

A Category III covered entity is one that has (i) at least $250 billion in average total consolidated assets, or (ii) (A) $100 billion in average total consolidated assets and (B) $75 billion or more in average total nonbank assets, average weighted short-term wholesale funding, or average off-balance sheet exposure.

A Category IV covered entity is one that has at least $100 billion in average total consolidated assets.

12 CFR 252.2 (BHCs and U.S. IHCs under Regulation YY); 12 CFR 238.2(cc)-(ee) (SLHCs under Regulation LL).

12 CFR 252.5(c) (BHCs and IHCs); 12 CFR 238.10(b) (SLHCs).

12 CFR 252.5(d) (BHCs and IHCs); 12 CFR 238.10(c) (SLHCs).

12 CFR 252.5(e) (BHCs and IHCs); 12 CFR 238.10(d) (SLHCs).

Given the size of covered entities, the agencies continue to believe that the failure of one or more covered entities or covered IDIs could potentially have a negative impact on U.S. financial markets and the broader U.S. economy. While several commenters to the ANPR downplayed this concern, this risk was demonstrated by the recent failures of SBNY, SVB, and First Republic,

which contributed to depositor outflows at other banking organizations. In addition, some covered entities have operations that have been identified as critical operations by the Board and FDIC, the disorderly wind down of which could pose additional risks to U.S. financial stability. These financial stability implications may increase the likelihood regulators quickly resolve a covered entity by selling its assets to a larger acquirer, an approach that may itself add to long-term financial stability concerns from increased concentration in the banking sector.

SBNY had total consolidated assets of around $110 billion, SVB had total consolidated assets of just over $200 billion, and First Republic had total consolidated assets of just over $230 billion at the time of failure. The agencies note that neither SBNY nor First Republic had a holding company, so in those cases it was solely an IDI that failed. However, their failures illustrate the potential risk of contagion in the event of the material distress or failure of a large IDI.

Question 2: Does the proposed scope of application appropriately address the risks discussed above? What additional factors, if any, should the Board consider in determining which entities should be subject to the proposed rule, other than those that are used to determine whether a covered entity is placed within Categories II-IV? For example, what additional or alternate factors should the Board consider in setting requirements for IHCs (e.g., should the proposed rule only apply to IHCs with IDIs that would be subject to the proposed rule's IDI requirements)? Are there elements of the rule that should be applied differently to Category IV organizations as compared to Category II and III organizations, and what would be the advantages and disadvantages of such differences in requirements?

Question 3: What additional characteristics of banking organizations should the Board consider in setting the scope of the proposed rule and why? Should consideration be given to additional characteristics such as reliance on uninsured deposits; proportion of assets, income, and employees outside of the IDI; or to other aspects of a covered entity's balance sheet? How should these characteristics affect the proposed scope? Please explain.

B. Covered Savings and Loan Holding Companies

As noted above, the proposed rule would apply to Category II, III, and IV SLHCs, as defined in 12 CFR 238.10. Section 10(g) of the Home Owners' Loan Act (HOLA)

authorizes the Board to issue such regulations and orders regarding SLHCs, including regulations relating to capital requirements, as the Board deems necessary or appropriate to administer and carry out the purposes of section 10 of HOLA. As the primary Federal regulator and supervisor of SLHCs, one of the Board's objectives is to ensure that SLHCs operate in a safe-and-sound manner and in compliance with applicable law. Like BHCs, SLHCs must serve as a source of strength to their subsidiary savings associations and may not conduct operations in an unsafe and unsound manner.

12 U.S.C. 1467a(g).

Section 165 of the Dodd-Frank Act directs the Board to establish specific enhanced prudential standards for large BHCs and companies designated by the Financial Stability Oversight Council to prevent or mitigate risks to the financial stability of the United States.

Section 165 does not prohibit the application of standards to SLHCs and BHCs pursuant to other statutory authorities.

12 U.S.C. 5365(a)(1).

Section 401(b) of the Economic Growth, Regulatory Relief, and Consumer Protection Act, Public Law 115-174, 132 Stat. 1356 (2018).

SLHCs that are covered HCs engage in many of the same activities and face similar risks as BHCs that are covered HCs. SLHCs that are covered HCs are substantially engaged in banking and financial activities, including deposit taking and lending.

Some SLHCs that are covered HCs engage in credit card and margin lending and certain complex nonbanking activities that pose higher levels of risk. SLHCs that are covered HCs may also rely on high levels of short-term wholesale funding, which may require sophisticated capital, liquidity, and risk management processes. Similar to BHCs that are covered HCs, SLHCs that are covered HCs conduct business across a large geographic footprint, which in times of stress could present certain operational risks and complexities. Subjecting SLHCs that are covered HCs to the proposed rule would improve their resolvability and promote their safe and sound operations.

The proposed rule would not apply to an SLHC with 25 percent or more of its total consolidated assets in insurance underwriting subsidiaries (other than assets associated with insurance underwriting for credit), an SLHC with a top-tier holding company that is an insurance underwriting company, or a grandfathered unitary SLHC that derives a majority of its assets or revenues from activities that are not financial in nature under section 4(k) of the Bank Holding Company Act (12 U.S.C. 1843(k)).

See

12 CFR 238.2(ff).

Question 4: What are the advantages and disadvantages to applying the proposed rule to SLHCs that are covered HCs in addition to BHCs that are covered HCs? How are the risks that an SLHC poses in resolution different from the risks that a BHC poses in resolution? How might those differences warrant a different LTD requirement for SLHCs relative to BHCs?

C. Calibration of Covered Entity LTD Requirement

Under the proposal, a covered entity would be required to maintain outstanding eligible LTD in an amount that is the greater of 6.0 percent of the covered entity's total risk-weighted

assets,

3.5 percent of its average total consolidated assets,

and 2.5 percent of its total leverage exposure if the covered entity is subject to the supplementary leverage ratio rule.

A covered entity would be prohibited from redeeming or repurchasing eligible LTD prior to its stated maturity date without obtaining prior approval from the Board where the redemption or repurchase would cause the covered entity's eligible LTD to fall below its LTD requirement.

Total risk weighted assets would be defined as the greater of a bank's standardized total risk-weighted assets and advanced approaches total risk-weighted assets, if applicable.

For purposes of the LTD minimum requirement, average total consolidated assets is defined as the denominator of the Board's tier 1 leverage ratio requirement.

See

12 CFR 217.10(b)(4).

See

12 CFR 217.10(c)(2).

The proposed eligible LTD requirement was calibrated primarily on the basis of a “capital refill” framework. Under that framework, the objective of the LTD requirement is to ensure that each covered entity has a minimum amount of eligible LTD such that, if the covered entity's going-concern capital is fully depleted and the covered entity fails and enters resolution, the eligible LTD would be sufficient to fully recapitalize the covered entity by replenishing its going-concern capital to at least the amount required to meet minimum leverage capital requirements and common equity tier 1 risk-based capital requirements plus the capital conservation buffer applicable to covered entities.

In terms of risk-weighted assets, a covered entity's common equity tier 1 capital level is subject to a minimum requirement of 4.5 percent of risk-weighted assets plus a capital conservation buffer equal to at least 2.5 percent.

Accordingly, a covered entity would be subject to an external LTD requirement equal to 7 percent of risk-weighted assets minus a 1 percentage point allowance for balance sheet depletion. This results in a proposed LTD requirement equal to 6 percent of risk-weighted assets. The 1 percentage point allowance for balance sheet depletion is appropriate under the capital refill theory because the losses that the covered entity incurs leading to its failure would deplete its risk-weighted assets as well as its capital. Accordingly, the pre-failure losses would result in a smaller balance sheet for the covered entity at the point of failure, meaning that a smaller dollar amount of capital would be required to restore the covered entity's pre-stress common equity tier 1 capital level. Although the specific amount of eligible external LTD necessary to restore a covered entity to its minimum required common equity tier 1 capital level plus minimum buffer in light of the diminished size of its post-failure balance sheet will vary, applying a uniform 1 percentage point allowance for balance sheet depletion avoids undue regulatory complexity.

See

12 CFR 217.11. A covered entity may be subject to a buffer greater than 2.5 percent under the capital rule due to the stress capital buffer or countercyclical capital buffer.

The application of the capital refill framework to the leverage-based capital component of the LTD requirement is analogous. A covered entity's tier 1 leverage ratio minimum is 4 percent of average total consolidated assets and its supplementary leverage ratio minimum is 3 percent of total leverage exposure, if the covered entity is subject to the supplementary leverage ratio.

Under the proposal, a covered entity would be subject to an LTD requirement equal to 3.5 percent of average total consolidated assets and 2.5 percent of total leverage exposure, if applicable. These requirements, with a balance sheet depletion allowance of 0.5 percentage points, are appropriate to ensure that a covered entity has a sufficient amount of eligible LTD to refill its leverage ratio minimums in the event it depletes all or substantially all of its tier 1 capital prior to failing.

Covered entities are not subject to a buffer requirement corresponding to their leverage ratio or SLR requirement.

The proposed eligible LTD requirement would support an MPOE

resolution through the process by which a covered IDI that is a consolidated subsidiary of a covered entity issues eligible LTD internally. The internally-issued LTD would be available to absorb losses that may otherwise be borne by uninsured depositors and certain other creditors of the subsidiary IDI in the event of its failure, thereby supporting market confidence in the safety of deposits even in the event of resolution, thus limiting the potential for bank runs. The proposed calibration would increase optionality for the FDIC as the LTD amount would be sufficient to capitalize a bridge depository institution and increase its marketability, leading to greater resale value. To the extent that a covered entity has several operating subsidiaries, their recapitalization would support their orderly wind down. In a single point of entry (SPOE)

resolution, the required LTD amount, in conjunction with a covered entity's existing equity capital, should be able to absorb losses and support recapitalization of the failed covered entity's material subsidiaries.

Under an MPOE strategy, multiple entities within a consolidated organization would enter separate resolution proceedings. For example, many covered entities plan that the parent holding company would file a petition under chapter 11 of the U.S. Bankruptcy Code, and that the FDIC would resolve the IDI subsidiary under the FDI Act.

In an SPOE resolution, only the covered HC itself would enter resolution. In the case of a covered IHC, an SPOE resolution strategy for the U.S. operations of the covered IHC, where the parent FBO pursues a global MPOE strategy, involves only the covered IHC entering into resolution while its subsidiaries would continue to operate. The eligible external LTD issued by the covered IHC would be used to absorb losses incurred by the IHC and its operating subsidiaries, enabling the recapitalization of the operating subsidiaries that had incurred losses and allowing those subsidiaries—including any IDIs—to continue operating on a going-concern basis. SPOE is also an option for the resolution of a covered entity under the Orderly Liquidation Authority provisions of Title II of the Dodd-Frank Act.

The calibration of the eligible LTD requirement is based on the capital refill framework, which depends on the precise structure and calibration of bank capital requirements. The Board will continue to evaluate the LTD requirement in light of any changes to capital requirements over time. In addition, the proposed rule would reserve the authority for the Board to require a covered entity to maintain more, or allow a covered entity to maintain less, eligible LTD than the minimum amount required by the proposed rule under certain circumstances. This reservation of authority would ensure that the Board could require a covered entity to maintain additional LTD if the covered entity poses elevated risks that the proposed rule seeks to address.

The proposed rule would also prohibit a covered entity from redeeming or repurchasing any outstanding eligible LTD without the prior approval of the Board if after the redemption or repurchase the covered entity would not meet its minimum LTD requirement. The proposed rule would allow a covered entity to redeem or repurchase its eligible LTD without prior approval where such redemption or repurchase would not result in the covered entity failing to comply with the minimum eligible LTD requirement. This would give the covered entity flexibility to manage its outstanding debt levels without interfering with the underlying purpose of the proposed rule. In addition, the proposed rule also includes a provision that would allow the Board, after providing a covered entity with notice and an opportunity to respond, to order the covered entity to exclude from its outstanding eligible LTD amount any otherwise eligible debt securities with features that would significantly impair the ability of such

debt securities to absorb loss in resolution.

Section 263.83 of the Board's rules of procedure describes the notice and response procedures that apply if the Board determines that a company's capital levels are not adequate.

See

12 CFR 263.83. The Board would follow the same procedures under the proposed rule to determine that a covered entity must exclude from its eligible LTD amount securities with features that would significantly impair the ability of such debt securities to absorb loss in resolution. For example, the Board would provide notice to a covered entity of its intention to require the covered entity to exclude certain securities from its eligible LTD amount and up to 14 days to respond before the Board would issue a final notice requiring that the covered entity to exclude the securities from its eligible LTD amount, unless the Board determines that a shorter period is necessary.

In addition, the Board could take an enforcement action against a covered entity for falling below its minimum LTD requirement. This would be consistent with the Board's authority to pursue enforcement actions for violations of law, rules, or regulations.

Question 5: What alternative calibration, if any, should the Board consider for the eligible LTD requirement to be applied to covered entities? Is the capital refill framework the appropriate methodology for covered entities? Should the requirements be higher or lower? What other factors should the Board consider in determining the appropriate calibration? How should differences in a covered entity's resolution strategy influence the calibration of the required LTD amount, if at all? Please discuss the advantages and disadvantages of alternative calibrations the Board should consider.

Question 6: Should the Board consider increasing or decreasing the calibration of the eligible external LTD requirement applicable to covered entities based on any other factors, such as the level of uninsured deposits at their IDI subsidiaries? If so, how should the Board differentiate between different types of uninsured deposits (e.g., what features of one type of uninsured deposits make such deposits more stable than other types of uninsured deposits), if at all, and at what level of uninsured deposits should the Board increase or decrease calibration for the LTD requirement? What other differentiated consideration or treatment should be afforded uninsured deposits with these characteristics?

Question 7: The proposal would require covered IDIs to issue LTD, as discussed more fully below. There may be circumstances in which IDIs within a single consolidated group might be required to issue, in the aggregate, a greater amount of internal LTD to a covered entity than the covered entity's external LTD requirement. What would be the advantages or disadvantages of requiring the covered entity to issue an amount of LTD that is as large as the aggregate amount that its covered IDI subsidiaries are required to issue? What alternative approaches should the Board consider to address this circumstance? How might the absence of such a requirement impede the proposed LTD requirement in achieving its intended purposes, if at all?

Question 8: The Board is considering whether and how to specify a period for covered entities to raise additional LTD after the entity has been involved in a situation where the FDIC has been appointed receiver. What are the advantages or disadvantages of permitting a period to raise additional LTD following such an event? How long should such a period reasonably be? Should the agencies specify a similar period for U.S. GSIBs and the U.S. IHCs of foreign GSIBs that are already subject to LTD and TLAC requirements?

IV. LTD Requirement for Covered IDIs

The proposed rule also would additionally create a new requirement for covered IDIs to issue eligible LTD. Requiring covered IDIs to maintain minimum amounts of eligible LTD, which would be available to absorb losses in the event of the failure of the IDI, would improve the FDIC's resolution options for the covered IDI. The objective of the IDI-level LTD requirement is to ensure that, if a covered IDI's equity capital is significantly or completely depleted and the covered IDI fails, the eligible IDI LTD would be available to absorb losses, which would help to protect depositors and certain other creditors and afford the FDIC additional optionality in resolving the IDI, including by supporting the transfer of all deposits to one or more acquirers. Where the failed bank is transferred to a bridge depository institution, the eligible LTD would help stabilize the operations of the bridge, thereby providing additional options for the FDIC to ultimately exit the bridge.

Several commenters to the ANPR suggested that increasing bank regulatory capital levels would be a more effective way to improve resiliency of covered entities and covered IDIs because additional capital would reduce their probability of default in the first place. While higher regulatory capital levels would reduce the probability of default of a covered IDI and may increase the chance that a covered entity or covered IDI would have remaining equity in the event of its failure, regulatory capital is likely to be significantly or completely depleted in the lead up to an FDI Act resolution. While eligible LTD would not help a troubled IDI remain adequately capitalized on a going-concern basis, it would significantly reduce the likelihood of contagion and loss to the DIF in resolving the failed bank. For example, if in the lead up to resolution an IDI were to fall below its minimum tier 1 capital requirements, any eligible LTD outstanding at the IDI level would have significant gone-concern benefits in that it would help to recapitalize the IDI. Because eligible LTD of a covered IDI would be available to absorb losses and protect depositors in the event of the failure of the IDI, it would increase optionality for the FDIC in resolving the IDI while meeting the least-cost requirement of the FDI Act. By supporting the FDIC's transfer of assets and deposits to a bridge depository institution in accordance with the least-cost requirement, eligible LTD may help preserve the franchise value of a failed bank and enable the FDIC to pursue restructuring options such as the sale of subsidiaries, branch networks, or business lines, as well as other potential options for divestiture and exit.

A covered IDI that is a consolidated subsidiary of a covered entity would be required to issue its eligible LTD to a company in the United States that consolidates the IDI for accounting purposes. In practice, the proceeds raised by the issuance of eligible LTD by a covered entity would generally be “downstreamed” to its covered IDI subsidiary in return for eligible internal LTD that would satisfy such covered IDI's own eligible LTD requirement. A covered IDI that is not a controlled subsidiary of a parent entity would be required to issue its eligible LTD to a party that is not an affiliate of the covered IDI. A covered IDI that is a consolidated subsidiary of a further parent entity that is not a covered entity would be permitted to issue its eligible LTD to a parent that controls the covered IDI or to investors that are not affiliates.

A. Scope of Application

The proposed rule would require four categories of IDIs to issue eligible LTD. First, the proposed rule would apply to any IDI that has at least $100 billion in total consolidated assets and is not controlled by a parent entity (mandatory externally issuing IDI). Second, the proposed rule would apply to any IDI that has at least $100 billion in total consolidated assets and (i) is a consolidated subsidiary of a company that is not a covered entity, a U.S. GSIB or a foreign GSIB subject to the TLAC

rule or (ii) is controlled but not consolidated by another company (permitted externally issuing IDI). Third, the proposed rule would apply to an IDI that has at least $100 billion in total consolidated assets and that is a consolidated subsidiary of a covered entity or a foreign GSIB IHC (internally issuing IDI).

Lastly, the proposed rule would apply to any IDI that is affiliated with an IDI in one of the first three categories (together with mandatory and permitted externally issuing IDIs and internally issuing IDIs, covered IDIs).

IDIs with $100 billion or more in total assets that are subsidiaries of Category II, III, and IV U.S. IHCs would be subject to the IDI-level requirement regardless of whether they ultimately are controlled by a global systemically important FBO.

The agencies propose to apply the IDI LTD requirement based on an IDI's size. While size is not the only indicator of complexity, it is a readily observable indicator, and, in general, IDIs with assets above $100 billion tend to be more complex in terms of their businesses and operations, are more difficult to resolve, and have a smaller pool of prospective acquirers. As IDIs cross the $100 billion threshold in total consolidated assets, their resolution can become increasingly costly to the DIF.

Covered IDIs under the proposed rule would include IDIs affiliated with IDIs that have at least $100 billion in total consolidated assets because the FDIC may seek to resolve an IDI with at least $100 billion in assets and its affiliated IDIs using either the same bridge depository institution or multiple bridge depository institutions. When an IDI in a group fails, it is likely that all IDIs in the group fail due to interconnectedness and the statutory cross-guaranty imposed on affiliated IDIs in the event of the failure of an IDI in the group.

In addition, affiliated IDIs may engage in complementary business activities, so placing them into a single bridge depository institution or coordinating marketing and resolution in multiple bridge depository institutions may improve marketability and attract a larger universe of potential acquirers. Therefore, the proposed rule would include affiliated IDIs in the definition of a covered IDI to help ensure that in the event the affiliated IDIs enter resolution together, a sufficient level of gone concern loss-absorbing resources will be present to enable the FDIC to use one or more bridge depository institutions to effectively resolve all of the affected covered IDIs.

See

12 U.S.C. 1815(e).

The proposed rule would apply to mandatory and permitted externally issuing IDIs for the reasons discussed above concerning the risks associated with IDIs that have at least $100 billion in total assets. The risks associated with the failure of a mandatory externally issuing IDI are not diminished because of the lack of a parent company and the risks associated with the failure of a permitted externally issuing IDI are not diminished because its parent is not subject to an LTD requirement. Mandatory and permitted externally issuing IDIs may not have the benefit of receiving the support of a holding company or being part of a regulated consolidated organization with diversified businesses. Applying the proposed rule to mandatory and permitted externally issuing IDIs in addition to those with a covered entity parent ensures competitive equality across all covered IDIs.

Question 9: What risks or resolution challenges are presented by IDIs with less than $100 billion in total consolidated assets? In what way do those risks or resolution challenges differ from those presented by IDIs with at least $100 billion in total consolidated assets?

Question 10: How should the agencies address any evasion concerns (e.g., holding companies managing their IDIs to stay below the $100 billion threshold to avoid the IDI LTD requirement)? What would be the advantages and disadvantages of setting the applicability threshold to be based on whether the total assets of the IDIs within a consolidated organization are, in the aggregate, at least $100 billion or more?

Question 11: What would be the advantages and disadvantages of allowing certain IDIs currently defined as internally issuing IDIs (e.g., covered IDIs that are consolidated subsidiaries of Category IV holding companies) to issue debt externally, even if they are a consolidated subsidiary of a covered entity? If the agencies were to allow some IDIs that are consolidated subsidiaries of a covered entity to issue debt externally, how should the agencies determine which IDIs may issue externally, and which would still be required to issue internally? Should such a requirement replace the requirement that the parent covered entity also issue debt externally?

Question 12: Are there special characteristics of mandatory externally issuing IDIs that affect whether a mandatory externally issuing IDI should be subject to a higher or lower LTD requirement than proposed? For example, should mandatory externally issuing IDIs be required to maintain an amount of LTD such that, if the IDI's equity capital is fully depleted and the LTD is used to capitalize a bridge depository institution, the bridge would be well-capitalized under the agencies' prompt corrective action rules?

Question 13: What would be the advantages and disadvantages to requiring permitted externally issuing IDIs to meet their minimum LTD requirement by issuing only eligible internal debt securities or eligible external debt securities rather than any combination of both? What would be the advantages and disadvantages to requiring such a permitted externally issuing IDI to meet its minimum LTD requirement by issuing eligible external LTD only, rather than allowing issuance to a parent holding company or other affiliates?

Question 14: Should the proposed rule require the holding company of a permitted externally issuing IDI that issues eligible LTD to its holding company to comply with the clean holding company requirements discussed in section VI?

Question 15: Should the agencies take into consideration the resolution plan of a covered entity submitted pursuant to Title I of the Dodd-Frank Act in determining which IDIs to scope into the proposed rule? For example, should the proposed IDI-level LTD requirement only apply to IDI subsidiaries of covered entities that have adopted an MPOE resolution strategy (i.e., (i) IDIs that are expected by the parent resolution plan filer to enter into receivership if its parent fails and (ii) where the Board and FDIC find that expectation to be reasonable)? What would be the advantages and disadvantages and potential incentive effects of applying an IDI-level LTD requirement to IDIs that are subsidiaries of covered entities that have adopted an SPOE resolution strategy? Certain covered IDIs are not subsidiaries of entities subject to a resolution planning requirement. Are there alternative approaches that might provide beneficial additional flexibility for these covered IDIs?

Question 16: What other methods could the agencies use to achieve the same benefits provided by the proposed rule concerning certainty of the ultimate availability of LTD resources at an IDI that ultimately enters resolution? Are there alternative approaches that might provide beneficial additional flexibility for covered entities in an SPOE resolution? What factors, such as the size and significance of non-bank activities, should the agencies consider in determining whether any such alternative approaches or additional requirements are appropriate?

Question 17: What would be the advantages and disadvantages of requiring IDI subsidiaries of U.S. GSIBs

to issue specified minimum amounts internal LTD? Should the agencies propose applying the same IDI-level requirements to these entities?

Question 18: For U.S. intermediate holding companies that are subject to the Board's TLAC rule, to what extent does the existing LTD requirement applicable at the IHC level already address the considerations underlying the proposed imposition of a further LTD requirement on any covered IDI subsidiary of such an IHC? For example, what would be the advantages or disadvantages of changing the proposal so that it would not require covered IDIs that are consolidated subsidiaries of IHCs owned by foreign GSIBs to issue internal LTD to the IHC?

Question 19: What are the advantages and disadvantages of requiring IDIs affiliated with IDIs that have at least $100 billion in consolidated assets to issue LTD pursuant to the proposed rule? What standard should be used for determining whether an IDI is an affiliate of a covered IDI? For example, should the IDI be treated as an affiliate of a covered IDI only if it is consolidated by the same company as the covered IDI? Should two IDIs be treated as affiliates only if they are under the common control of a company (as opposed to a natural person)? What are the advantages and disadvantages of making subject to the proposed rule all affiliated IDIs as compared to only those that are consolidated by the same company as the covered IDI?

Question 20: Under the proposal, an IDI with less than $100 billion in total consolidated assets would be subject to the proposed rule if it is affiliated with an IDI that has at least $100 billion in total assets, including when the two IDIs are not consolidated by the same holding company or the two IDIs are commonly controlled by a natural person. Should the proposed rule include a minimum size requirement for such an affiliated IDI to be subject to the proposed rule? For example, should only affiliated IDIs with at least an amount of assets set between $1 billion and $50 billion be subject to the proposed rule? What would be an appropriate threshold, or are there other parameters the proposed rule should employ to establish when an affiliated IDI would be subject to the proposed rule? As an alternative to an asset size threshold or other parameter, should the agencies consider reserving the authority to exempt certain IDIs from the LTD requirement?

B. Calibration of Covered IDI LTD Requirement

Under the proposal, a covered IDI would be required to maintain outstanding eligible LTD in an amount that is the greater of 6.0 percent of the covered IDI's total risk-weighted assets, 3.5 percent of its average total consolidated assets,

and 2.5 percent of its total leverage exposure if the covered IDI is subject to the supplementary leverage ratio.

For purposes of the LTD minimum requirement, average total consolidated assets is defined as the denominator of the agencies' tier 1 leverage ratio requirement.

See

12 CFR 3.10(b)(4) (OCC), 12 CFR 217.10(b)(4) (Board), 12 CFR 324.10(b)(4) (FDIC).

See

12 CFR 3.10(c)(2) (OCC), 12 CFR 217.10(c)(2) (Board), 12 CFR 324.10(c)(2) (FDIC).

The proposed IDI LTD requirement is calibrated by reference to the covered IDI's balance sheet and to ensure that sufficient LTD would be available at the covered IDI. The IDI LTD requirement is also calibrated to help ensure that the resolution of a covered IDI does not impose unduly high costs on the economy.

The proposed IDI LTD requirement has been calibrated so that, assuming a failed covered IDI's equity capital is significantly or completely depleted, the eligible LTD outstanding would be sufficient to capitalize a newly-formed bridge depository institution with an amount necessary to comply with the minimum leverage capital requirements and common equity tier 1 risk-based capital requirements plus buffers applicable to ordinary non-bridge IDIs after accounting for some balance sheet depletion.

The proposed calibration would appropriately support the FDIC in resolving covered IDIs under the FDI Act because the eligible LTD at the IDI could improve market confidence, improve the marketability of the failed IDI, and stabilize the bridge depository institution, thereby providing more optionality in resolution. Importantly, it could also provide for an exit from resolution by enabling a recapitalized bridge depository institution to exit from resolution as a newly chartered IDI following a period of stabilization and restructuring.

The amount of LTD required to be positioned at the covered IDI is based upon the balance sheet of the covered IDI and will reflect the size and importance of the covered IDI relative to the group. Thus, it improves the optionality of resolution at an IDI level while also potentially supporting an SPOE resolution of the covered entity in the event that option is available and would be effective.

Externally issuing IDIs would be subject to the same calibration as other covered IDIs, as they can have similar risk profiles, asset compositions, and liability structures as other covered IDIs and hence should have similar resolution-related resource needs.

For example, in an SPOE resolution, if the covered IDI is a consolidated subsidiary of a covered entity, the covered entity could support the covered IDI by forgiving the eligible internal LTD issued by the covered IDI.

The proposed rule would authorize an agency to require a covered IDI that it supervises to maintain an amount of eligible LTD that is greater than the minimum requirement in the proposed rule under certain circumstances. This would ensure that a covered IDI that presents elevated risk that the proposed rule seeks to address would be required to maintain a corresponding amount of eligible LTD.

The proposed rule would include a provision that would allow the appropriate Federal banking agency, after providing a covered IDI with notice and an opportunity to respond, to order the covered IDI to exclude from its outstanding eligible LTD any otherwise eligible debt securities with features that would significantly impair the ability of such debt securities to absorb losses in resolution.

See

12 CFR 3.404 (OCC), 12 CFR 263.83 (Board), and 12 CFR 324.5(c) (FDIC).

In addition, the appropriate Federal banking agency could take an enforcement action against a covered IDI for falling below a minimum IDI LTD requirement. This would be consistent with the agencies' authority to pursue enforcement actions for violations of law, rules, or regulations.

Question 21: What alternative calibrations should the agencies consider for the IDI LTD requirement? What other factors should the agencies consider in determining the appropriate calibration? The proposed rule would require covered IDIs to maintain an amount of LTD so that, if the LTD were written off, it would recapitalize a covered IDI to the well capitalized standards for IDIs under the common equity tier 1 risk-based capital requirements (after accounting for expected balance sheet depletion). What would be the advantages and disadvantages of requiring a covered IDI to maintain an amount of LTD that would be sufficient to recapitalize the covered IDI to “well-capitalized” standards relative to (1) tier-1 risk-based capital requirements, (2) total risk-based capital requirements, and (3) average total consolidated assets under the

agencies' prompt corrective action standards in the event of failure?

Question 22: What would be the advantages and disadvantages of proposing a different calibration for mandatory and permitted externally issuing IDIs, which do not have a parent holding company that is subject to an external LTD requirement?

Question 23: How should the calibration for the IDI LTD requirement relate, if at all, to the level of uninsured deposits outstanding at a covered IDI, either in absolute terms or relative to the IDI's liabilities? If such an approach were taken, at what level(s) of uninsured deposits should the agencies modify the calibration for the IDI LTD requirement?

Question 24: The agencies are considering whether and how to specify a period for covered IDIs to raise additional LTD after the entity has been involved in a situation in which the FDIC has been appointed receiver. What are the advantages or disadvantages of permitting a period for the covered IDI to raise additional LTD following such an event? How long should such a period reasonably be?

V. Features of Eligible LTD

The proposal would require LTD to satisfy certain eligibility criteria to qualify as eligible LTD. Although the requirements for all eligible LTD generally would be the same under the proposed rule, eligible external LTD would have certain features not applicable to eligible LTD issued within a consolidated organization (eligible internal LTD). As discussed above, covered HCs and mandatory externally issuing IDIs may only issue eligible external LTD to satisfy the proposed LTD requirement. Internally issuing IDIs and nonresolution covered IHCs must issue eligible internal LTD, while permitted externally issuing IDIs and resolution covered IHCs may issue either (see section V, subsection C for discussion of nonresolution and resolution covered IHCs). The general purpose of these requirements is to ensure that LTD used to satisfy the proposed rule is in fact able to be used effectively and appropriately to absorb losses in support of the orderly resolution of the issuer. The proposed requirements for eligible LTD are generally the same as those required for firms subject to the TLAC rule.

See

12 CFR 252.61 and .161 “Eligible debt security.”

Question 25: What are the advantages and disadvantages of limiting the types of instruments that qualify as eligible LTD? Would any of the proposed required features for eligible LTD be unnecessary or counterproductive as applied to any of the covered entities or covered IDIs? If so, explain why.

A. Eligible External LTD

Under the proposed rule, eligible external LTD issued by covered HCs, mandatory and permitted externally issuing IDIs, and resolution covered IHCs (together, external issuers) must be paid in and issued directly by the external issuer, be unsecured, have a maturity of greater than one year from the date of issuance, have “plain vanilla” features (that is, the debt instrument has no features that would interfere with a smooth resolution proceeding), be issued in a minimum denomination of $400,000, and be governed by U.S. law.

In addition, principal due to be paid on eligible external LTD in one year or more and less than two years would be subject to a 50 percent haircut for purposes of the external LTD requirement. Principal due to be paid on eligible external LTD in less than one year would not count toward the external LTD requirement. Tier 2 capital that meets the definition of eligible external LTD would continue to count toward the external LTD requirement.

If a national bank or Federal savings association intends for LTD to qualify as tier 2 capital, the instrument must also satisfy the requirements for subordinated debt at 12 CFR 5.47 (for national banks) and 12 CFR 5.56 (for Federal savings associations). If the national bank or Federal savings association does not intend to treat the LTD as subordinated debt that qualifies as tier 2 capital, the LTD does not need to satisfy these requirements. In any event, all offers and sales of securities by a national bank or Federal savings association are subject to the disclosure requirements set forth at 12 CFR part 16.

Consistent with this purpose, the proposed rule would authorize the agencies, after providing an external issuer with notice and an opportunity to respond, to order the external issuer to exclude from its outstanding LTD amount any otherwise eligible debt securities with features that would significantly impair the ability of such debt securities to absorb losses in resolution.

This provision would enable the agencies to respond to new types of LTD instruments, ensuring the proposed rule remains responsive to developments in LTD instruments.

The Board would exercise this authority with respect to covered entities. For covered IDIs, a bank's primary Federal banking agency would exercise this authority.

1. External Debt Issuance Directly by Covered Entities and Covered IDIs

Eligible external LTD would be required to be paid in and issued directly by the external issuer. Thus, debt instruments issued by a subsidiary of a covered entity or covered IDI would not qualify as eligible external LTD.

The requirement that eligible external LTD be issued directly by the covered entity or covered IDI and not a subsidiary would serve several purposes. In the case of eligible external LTD issued by a covered entity that is in turn matched by eligible internal LTD at a covered IDI subsidiary, the requirement would make sure that the covered entity has an amount of stable funding that is sourced externally and that could be used to purchase the LTD issued by the covered IDI subsidiary to meet the IDI's minimum LTD requirement.

Additionally, requiring eligible external LTD to be issued by the covered entity (or, in the case of a permitted or mandatory externally issuing IDI, the covered IDI) and not a subsidiary would simplify administration of the proposed rule by preventing a banking organization from issuing external LTD from multiple entities, which could complicate the firm's internal monitoring and examiner monitoring for compliance with the proposed rule. This requirement also would take advantage of the fact that, within a consolidated organization, the holding company generally is the entity used as a capital raising vehicle.

Finally, for external issuers that are covered entities, issuance directly from the covered entity and not a subsidiary would provide flexibility to support a range of resolution strategies. For instance, use by an external issuer (such as a covered HC) of proceeds from the issuance of eligible external LTD to purchase eligible internal LTD from a covered IDI subsidiary would support resolution of the covered IDI under the FDI Act. Where SPOE is an available option, the issuer's eligible external LTD could be used to absorb losses incurred throughout the banking organization, enabling the recapitalization of operating subsidiaries that had incurred losses and enabling those subsidiaries to continue operating on a going-concern basis. For an SPOE approach to be implemented successfully, the eligible external LTD must be issued directly by the covered entity because debt issued by a subsidiary generally cannot be used to absorb losses, even at the issuing subsidiary itself, unless that subsidiary enters a resolution proceeding.

Eligible external LTD also may only be held by certain investors. In the case of covered entities, eligible external LTD must be held by a nonaffiliate. The requirement for eligible external LTD to not be held by an affiliate ensures that LTD issuance generates new loss-absorbing capacity that is truly held

externally from the issuer. This requirement also helps ensure that LTD holders are positioned to serve as a source of market discipline for the external issuer. LTD holders may be less likely to critically monitor the performance of the issuer if the holders are affiliated with the issuer. Eligible external LTD issued by a permitted or mandatory externally issuing IDI likewise could not be issued to an affiliate, except an affiliate that controls but does not consolidate the covered IDI (

e.g.,

where a company owns at least 25 percent of, but does not meet the accounting standard to consolidate, a covered IDI). Without this exception for upstream affiliates, eligible LTD of a permitted externally issuing IDI could be held by a company that consolidates the covered IDI (in the form of eligible internal LTD), but not a company that controls without consolidating the covered IDI. Such a prohibition would serve no purpose. Accordingly, the proposal permits a permitted or mandatory externally issuing IDI to issue eligible external LTD to such an affiliate.

2. Unsecured

Eligible external LTD would be required to be unsecured, not guaranteed by the external issuer or a subsidiary or an affiliate of the external issuer, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument (such as a credit enhancement provided by an affiliate).

The primary rationale for these restrictions is to ensure that eligible external LTD can serve its intended purpose of absorbing losses incurred by the banking organization in resolution. To the extent that a creditor is secured, or provided with credit support of any type, it can avoid suffering losses by seizing the collateral that secures the debt. The debt being secured would thwart the purpose of eligible external LTD by leaving losses with the external issuer (which would lose the collateral) rather than imposing them on the eligible external LTD creditor (which could take the collateral). As a result, this requirement ensures that losses can be imposed on eligible LTD in resolution in accordance with the standard creditor hierarchy under bankruptcy or an FDI Act resolution, under which secured creditors are paid ahead of unsecured creditors.

A secondary purpose of these restrictions is to prevent eligible external LTD from contributing to the asset fire sales that can occur when a financial institution fails and its secured creditors seize and liquidate collateral. Asset fire sales can drive down the value of the assets being sold, which can undermine financial stability by transmitting financial stress from the failed firm to other entities that hold similar assets.

3.“Plain Vanilla”

Eligible external LTD instruments would be required to be “plain vanilla” instruments. Exotic features could create complexity and thereby diminish the prospects for an orderly resolution of the external issuer. These limitations would help to ensure that eligible external LTD represents loss-absorbing capacity with a definite value that can be quickly determined in resolution. In a resolution proceeding, claims represented by such “plain vanilla” debt instruments are more easily ascertainable and relatively certain compared to more complex and volatile instruments. Permitting exotic features could engender uncertainty as to the level of the issuer's loss-absorbing capacity and could increase the complexity of the resolution proceeding and potentially result in a disorderly resolution.

Under the proposed rule, external LTD instruments would be excluded from treatment as eligible external LTD if they: (i) are structured notes; (ii) have a credit-sensitive feature; (iii) include a contractual provision for conversion into or exchange for equity in the issuer; or (iv) include a provision that gives the holder a contractual right to accelerate payment (including automatic acceleration), other than a right that is exercisable (1) on one or more dates specified in the instrument, (2) in the event of the issuer entering into insolvency or resolution proceedings, or (3) the issuer's failure to make a payment on the instrument when due that continues for 30 days or more.

This limitation would be subject to an exception that would permit eligible external LTD instruments to give the holder a future put right as of a date certain, subject to the provisions discussed below regarding when the debt is due to be paid.

a. Structured Notes

The proposed rule would exclude structured notes, including principal-protected structured notes, from treatment as eligible external LTD. Structured notes contain features that could make their valuation uncertain, volatile, or unduly complex. In addition, they are often liabilities held by retail investors (as opposed to institutional investors) and, as discussed in greater detail below in the context of minimum denomination requirements, holdings of LTD by more sophisticated investors can better ensure that LTD holders understand the risks of LTD and that such holders are in a position to provide market discipline with respect to LTD issuers. To promote resiliency and market discipline, it is important that external issuers maintain a minimum amount of loss-absorbing capacity with a value that is easily ascertainable at any given time. Moreover, in resolution, debt instruments that will be subjected to losses must be capable of being valued accurately and with minimal risk of dispute. The requirement that eligible external LTD not contain the features associated with structured notes advances these goals.

For purposes of the proposed rule, a “structured note” is defined as a debt instrument that: (i) has a principal amount, redemption amount, or stated maturity that is subject to reduction based on the performance of any asset,

entity, index, or embedded derivative or similar embedded feature; (ii) has an embedded derivative or similar embedded feature that is linked to one or more equity securities, commodities, assets, or entities; (iii) does not have a minimum principal amount that becomes due and payable upon acceleration or early termination; or (iv) is not classified as debt under U.S. GAAP. The definition of a structured note does not include a non-dollar-denominated instrument or an instrument whose interest payments are based on an interest rate index (for example, a floating-rate note linked to the Federal funds rate or to the secured overnight financing rate), in each case that satisfies the proposed requirements in all other respects.

Assets would include loans, debt securities, and other financial instruments.

Structured notes with principal protection often combine a zero-coupon bond, which pays no interest until the bond matures, with an option or other derivative product, whose payoff is linked to an underlying asset, index, or benchmark.

For external issuances by covered entities, the derivative feature violates the intent of the clean holding company requirements (described below), which prohibit derivatives entered into by covered entities with third parties. Moreover, investors in structured notes tend to pay less attention to issuer credit risk than investors in other LTD, because structured note investors use structured notes to gain exposure unrelated to the

market discipline objective of the minimum LTD requirements.

U.S. Securities and Exchange Commission, Structured Notes with Principal Protection: Note the Terms of Your Investment (June 1, 2011),

https://www.sec.gov/investor/alerts/structurednotes.htm.

b. Contractual Provision for Conversion Into or Exchange for Equity

The proposed rule would exclude from treatment as eligible external LTD debt that includes contractual provisions for its conversion into equity or for it to be exchanged for equity. The fundamental objective of the external LTD requirement is to ensure that external issuers will have a minimum amount of loss-absorbing capacity available to absorb losses upon the issuer's entry into resolution. Debt instruments that could convert into equity prior to resolution may not serve this goal, since the conversion would reduce the amount of debt that will be available to absorb losses in resolution. In addition, debt with features to allow conversion into equity is often complex and thus may not be characterized as “plain vanilla.” Convertible debt instruments may be viewed as debt instruments with an embedded equity call option. The embedded equity call option introduces a derivative-linked feature to the debt instrument that is inconsistent with the purpose of the clean holding company requirements (described below) and introduces uncertainty and complexity into the value of such securities. For these reasons, eligible external LTD may not include contractual provisions allowing for its conversion into equity or for it to be exchanged for equity prior to the issuer's resolution under the proposed rule.

c. Credit-Sensitive Features and Acceleration Clauses

Under the proposal, eligible external LTD cannot have a credit-sensitive feature or provide the holder of the instrument a contractual right to the acceleration of payment of principal or interest at any time prior to the instrument's stated maturity (an acceleration clause), other than upon the occurrence of either a receivership, liquidation, or similar proceeding,

or a payment default event. However, eligible external LTD instruments would be permitted to give the holder a put right as of a future date certain, subject to the remaining maturity provisions discussed below.

For the avoidance of doubt, this provision should not be construed to mean that eligible external LTD could be accelerated upon an IDI merely being insolvent.

The restriction on acceleration clauses serves the same purpose as several of the other restrictions discussed above,

i.e.,

to ensure that the required amount of LTD will indeed be available to absorb losses in resolution. Early acceleration clauses, including cross-acceleration clauses, could undermine an orderly resolution by forcing the issuer to make payment on the full value of the debt prior to the entry of the issuer into resolution, potentially depleting the issuer's eligible external LTD immediately prior to resolution. This concern does not apply to acceleration clauses that are triggered by an insolvency or resolution event, however, because the insolvency or resolution that triggers the clause would generally occur concurrently with the issuer's entry into an insolvency or a resolution proceeding.

Senior debt instruments issued by external issuers commonly also include payment default event clauses. These clauses provide the holder with a contractual right to accelerate payment upon the occurrence of a “payment default event”—that is, a failure by the issuer to make a required payment when due. Payment default event clauses, which are not permitted in tier 2 regulatory capital, raise more concerns than insolvency or resolution event clauses because a payment default event may occur (triggering acceleration) before the institution has entered a resolution proceeding and a stay has been imposed. Such a pre-resolution payment default event could cause a decline in the issuer's loss-absorbing capacity.

Nonetheless, the proposed rule would permit eligible external LTD to be subject to payment default event acceleration rights for two reasons. First, default or acceleration rights upon a borrower's default on its direct payment obligations are a standard feature of senior debt instruments, such that a prohibition on such rights could be unduly disruptive to the potential market for eligible external LTD. Second, the payment default of an issuer on an eligible external LTD instrument would likely be a credit event of such significance that whatever diminished capacity led to the payment default event would also be a sufficient trigger for an insolvency or a resolution event acceleration clause, in which case a prohibition on payment default event acceleration clauses would have little or no practical effect.

In addition, the proposed rule would provide that an acceleration clause relating to a failure to pay principal or interest must include a “cure period” of at least 30 days. During this cure period, the issuer could make payment on the eligible external LTD before such debt could be accelerated and if the issuer satisfies its obligations on the eligible external LTD within the cure period, the instrument could not be accelerated. This would ensure that an accidental or temporary failure to pay principal or interest does not trigger immediate acceleration. Moreover, this cure period for interest payments is found in many existing debt instruments and is consistent with current market practice.

4. Minimum Remaining Maturity and Amortization

Under the proposal, the amount of eligible external LTD that is due to be paid between one and two years would be subject to a 50 percent haircut for purposes of the external LTD requirement, and the amount of eligible external LTD that is due to be paid in less than one year would not count toward the external LTD requirement.

The purpose of these restrictions is to limit rollover risk of debt instruments that qualify as eligible external LTD and ensure that eligible external LTD provides stable funding and will be reliably available to absorb losses in the event that the issuer fails and enters resolution. Debt that is due to be paid in less than one year does not adequately serve these purposes because of the possibility that the debt could mature during the period between the time when the issuer begins to experience extreme stress and the time when it enters a resolution proceeding. If the debt matures during that period, then it would be likely that the creditors would be unwilling to maintain their exposure to the issuer and would therefore refuse to roll over the debt or extend new credit, and the distressed issuer would likely be unable to replace the debt with new LTD that would be available to absorb losses in resolution. This run-off dynamic could result in a case where the covered entity enters resolution with materially less loss-absorbing capacity than would be required to support or recapitalize its IDIs or other subsidiaries, potentially resulting in a disorderly resolution. To protect against this outcome, eligible external LTD would cease to count toward the external LTD requirement upon being due to be paid in less than one year, so that the full required amount of loss-absorbing capacity would be available in resolution even if the resolution period were preceded by a year-long stress period.

This requirement also accords with market convention, which generally defines “long-term debt” as debt with maturity in excess of one year.

For the same reasons, eligible external LTD that is due to be paid in less than two years but greater than or equal to one year is subject to a 50 percent haircut under the proposed rule for

purposes of the external LTD requirement, meaning that only 50 percent of the value of its principal amount would count toward the external LTD requirement. This amortization provision is intended to protect an issuer's loss-absorbing capacity against a run-off period in excess of one year (as might occur during a financial crisis or other protracted stress period) in two ways. First, it requires issuers that rely on eligible external LTD that is vulnerable to such a run-off period (because it is due to be paid in less than two years) to maintain additional loss-absorbing capacity in the form of eligible external LTD. Second, it leads issuers to reduce or eliminate their reliance on loss-absorbing capacity that is due to be paid in less than two years. An issuer could reduce its reliance on eligible external LTD that is due to be paid in less than two years by staggering its issuance, by issuing eligible external LTD that is due to be paid after a longer period, or by redeeming and replacing eligible external LTD once the residual maturity falls below two years.

The proposed rule also provides similar treatment for eligible external LTD that could become subject to a “put” right—that is, a right of the holder to require the issuer to redeem the debt on demand—prior to reaching its stated maturity. Such an instrument would be treated as if it were due to be paid on the day on which it first became subject to the put right, since on that day the creditor would be capable of demanding payment and thereby subtracting the value of the instrument from the issuer's loss-absorbing capacity.

The date on which principal is due to be paid would be calculated from the date the put right would first be exercisable regardless of whether the put right would be exercisable on that date only if another event occurred (

e.g.,

a credit rating downgrade).

5. Governing Law

Eligible external LTD instruments would be required to consist only of liabilities that can be effectively used to absorb losses during the resolution of the external issuer without giving rise to material risk of successful legal challenge. To this end, the proposal would require eligible external LTD to be governed by the laws of the United States or any State.

LTD that is subject to foreign law would potentially be subject to legal challenge in a foreign jurisdiction, which could jeopardize the orderly resolution of the issuer. Foreign courts might not defer to actions of U.S. courts or U.S. resolution authorities that would impair the eligible LTD, for example, where such actions negatively impact foreign bondholders or foreign shareholders. While the presence of recognition regimes abroad does improve the likelihood that these actions would be enforced, it does not guarantee it.

Consistent with the definition of “State” in the TLAC rule and the Board's Regulation YY, “State” would be defined to mean “any state, commonwealth, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, or the United States Virgin Islands.”

See

12 CFR 252.2.

6. Minimum Denomination and Investor Limitations

The proposed rule also would require eligible external LTD to be issued through instruments with minimum principal denominations and would exclude from eligible external LTD instruments that can be exchanged by the holder for smaller denominations.

The purpose of this requirement is to limit direct investment in eligible LTD by retail investors. Significant holdings of LTD by retail investors may create a disincentive to impose losses on LTD holders, which runs contrary to the agencies' intention that LTD holders expect to absorb losses in resolution after equity shareholders. Imposing requirements that will tend to limit investments in LTD to more sophisticated investors will help ensure that LTD holders will monitor the performance of the issuer and thus support market discipline. These more sophisticated investors are more likely to appreciate that LTD that satisfies the requirements of the proposed rule may present different risks than other types of debt instruments issued by covered entities, covered IDIs, or other firms.

The Board also is proposing to introduce an identical requirement for external LTD issued pursuant to the TLAC rule, as discussed in Section IX.B below.

The agencies propose setting the minimum denomination requirement at $400,000. A required minimum denomination of $400,000 would fall in the range of reasonable minimum denomination levels described below and would generally disincentivize direct holdings of such investments by retail investors without preventing institutional investors from purchasing eligible external LTD. In the agencies' experience, most institutional investors are able to purchase instruments in minimum denominations of $400,000. In addition, according to the 2019 Survey of Consumer Finances, the median value of the total portfolio of directly-held bonds for households that had at least one bond and had household incomes in the 90th to 100th percentiles was $400,000.

Setting the minimum denomination at this level would likely substantially limit the amount of households that would directly invest in eligible LTD.

Board of Governors of the Federal Reserve System, Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances (Sept. 2020),

https://www.federalreserve.gov/publications/files/scf20.pdf.

This number reflects households that have at least one bond. In this context, “bonds” include only those held directly (not part of a managed investment account or bond fund) and include corporate and mortgage-backed bonds; Federal, state, and local government bonds; and foreign bonds.

Id.

The agencies considered alternative minimum denomination thresholds between $100,000 and $1 million. There are several arguments to support the reasonableness of a minimum denomination requirement at thresholds between $100,000 and $1 million. Setting the minimum denomination at $100,000 would likely result in well over half of retail investors not participating in the market for direct purchases of eligible LTD, which would meaningfully accomplish the agencies' goal of generally reducing the degree of direct retail investor holdings of eligible LTD. According to the Survey of Consumer Finances, the median value of the total portfolio of directly-held bonds for households that had at least one bond in 2019 was $121,000.

If eligible LTD is issued in minimum denominations of $100,000, it would be possible but unlikely that a household that directly holds an aggregate amount of individual bonds equal to this $121,000 figure would include within such holdings any eligible LTD instruments because, in that case, the minimum denomination associated with the eligible LTD instrument would cause such instrument to represent nearly the entirety of such bond holdings. A minimum denomination requirement of $1 million could therefore also be reasonable. As noted above, the 2019 Survey of Consumer Finances found that the median value of the aggregate amount of individual, directly-held bonds for households that held at least one bond and with household incomes in the 90th to 100th percentiles was $400,000.

Setting the minimum denomination threshold at $1 million could thus be expected to exclude most households. The agencies also would not expect a minimum $1 million denomination requirement to exclude a material number of institutional investors from purchasing LTD.

Id.

Question 26: What would be the advantages and disadvantages of limiting direct retail investor exposure to eligible external LTD? To what extent would retail investors be likely to directly own eligible external LTD? Do retail investors, investing on a direct basis as opposed to through institutional funds, constitute a substantial portion of the market for debt instruments such as eligible external LTD, such that prohibiting their direct investment would meaningfully reduce the market for eligible LTD?

Question 27: To what extent would limiting direct retail holdings of eligible external LTD contribute to concentration of eligible external LTD holdings by certain market participants?

Question 28: What minimum denomination amount is most appropriate in the range of $100,000 to $1 million? Would an amount greater than $400,000 be appropriate to provide further assurance these instruments will generally be held by investors who are well positioned to exercise market discipline and bear loss in the event of the failure of the issuer? Should the agencies require the debt instrument for eligible LTD to expressly prohibit their exchange into smaller denominations? Please explain.

Question 29: What would be the advantages and disadvantages to limiting indirect exposures to eligible LTD by retail investors?

7. Subordination of Eligible LTD Issued by IDIs

The proposed rule would require eligible LTD issued by a covered IDI to be contractually subordinated so that the claim represented by the LTD in the receivership of the IDI would be junior to deposit and general unsecured claims.

This requirement would ensure that eligible LTD absorbs losses prior to depositors and other unsecured creditors, which increases the FDIC's optionality when acting as a receiver for a failed IDI. For example, as discussed above, the presence of eligible LTD at an IDI would increase the likelihood that the FDIC could transfer all of the deposit liabilities (insured and uninsured) of a failed bank to a bridge depository institution, thereby preserving the IDI's franchise value.

The proposed rule would define “deposits” to have the same meaning as in the FDI Act.

See

12 U.S.C. 1813(

). The eligible LTD would rank in priority in an FDIC receivership after deposits and general unsecured liabilities, as established at 12 U.S.C. 1821(d)(11)(A)(iv).

Requiring contractual subordination would also provide further clarity about the priority of the claim represented by eligible LTD in a receivership of the issuing institution, which facilitates an orderly resolution. The FDIC may need to transfer certain general unsecured claims, which could include trade creditors (if any) and non-dually-payable foreign deposits,

to a newly-established bridge depository institution in order to facilitate its operations. By requiring that eligible LTD issued by IDIs be contractually subordinated to general unsecured creditor claims, the eligible LTD would also serve to protect those claims, providing greater optionality to the FDIC in structuring a resolution. While the eligible LTD requirement for covered entities does not include a contractual subordination requirement, in the case that the IDI fails, eligible LTD issued by covered entities will be structurally subordinated to creditor claims against the subsidiary IDI.

See

Final Rule on “Deposit Insurance Regulations; Definition of Insured Deposit,” 78 FR 56583 (Sept. 13, 2013),

https://www.govinfo.gov/content/pkg/FR-2013-09-13/pdf/2013-22340.pdf.

Question 30: What would be the advantages and disadvantages of requiring eligible LTD issued by covered IDIs to be subordinated to general unsecured creditors? What implications, if any, would subordination of eligible LTD to general unsecured creditors have for other requirements?

Question 31: What are the advantages and disadvantages of limiting the types of instruments that qualify as eligible external LTD? Would any of the proposed features for eligible external LTD not be appropriate for any covered entities or covered IDIs? What characteristics of the specific types of institutions required to issue internal LTD under the proposed rule would caution against requiring eligible internal LTD to meet any of the proposed eligibility requirements?

B. Eligible Internal LTD

The requirements for eligible internal LTD are generally the same as those for eligible external LTD. However, eligible internal debt securities are subject to two key distinctions from eligible external debt securities under the proposed rule. First, eligible internal LTD issued by an IDI must be issued to and remain held by a company that consolidates the covered IDI, generally an upstream parent. Second, eligible internal LTD would not be subject to the minimum principal denomination requirement. As discussed further below, eligible internal LTD issued by a covered IHC would be required to include a contractual conversion trigger and would not include a prohibition against credit sensitive features.

Where a covered IDI issues eligible internal LTD, such eligible internal LTD would be required to be paid in and issued to a company that consolidates the covered IDI.

This helps ensure that eligible internal LTD issued by the covered IDI is supported by stable funding from its parent, which in turn is generally required to issue eligible external LTD. Accordingly, a covered entity could use the proceeds from the issuance of external LTD to purchase internal LTD issued by its IDI subsidiary.

As discussed above, permitted externally issuing IDIs would be permitted to issue eligible LTD to affiliates and to nonaffiliates.

For a covered IDI that is a consolidated subsidiary of a covered IHC, the proposed rule would require that eligible internal LTD of the covered IDI be issued to the covered IHC, or a subsidiary of the covered IHC that consolidates the IDI. In other words, to constitute eligible internal LTD, the LTD of such an IDI could not be directly issued to a foreign affiliate that controls the IDI; doing so would mean that losses could be imposed on foreign affiliates through the IDI's LTD, rather than passing up to the covered IHC, which in turn has issued outstanding loss-absorbing LTD. This requirement is consistent with the design of internal eligible LTD issued by a covered IHC to its foreign parent or a wholly owned subsidiary of that foreign parent. Internal LTD issued by a covered IHC to a foreign parent must contain a contractual conversion trigger, which is discussed below.

Certain covered IHCs that would not be expected to enter into resolution upon the failure of their parent FBOs would be required to issue eligible internal LTD to a foreign company that directly or indirectly controls the covered IHC, or to a wholly owned subsidiary of a controlling foreign company.

This would ensure that losses incurred by a covered IHC would be distributed to a foreign affiliate that is not a subsidiary of the covered IHC, which would allow the foreign top-tier parent to manage the resolution strategy for its global operations and manage

how the IHC would fit into this global resolution strategy. The requirement also would mitigate the risk that conversion of the eligible LTD to equity, as discussed below, would result in a change in control of the covered IHC, which could create additional regulatory and management complexity during a failure scenario.

Consistent with the TLAC rule, a “wholly owned subsidiary” of a FBO would be one where the foreign parent owns 100 percent of the subsidiary's outstanding ownership interests, except that 0.5 percent could be owned by a third party for purposes of establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns. This recognizes the practice of FBOs to own all but a small part of a subsidiary for corporate practice purposes with which the proposed rule is not intended to interfere. Moreover, allowing a very small amount of a foreign parent's subsidiary to be owned by a third party would not undermine the purposes of this proposed rule.

The proposed rule would not require eligible internal LTD to be issued in minimum denominations. As discussed above, the purpose of the minimum denomination requirement is to increase the chances that LTD holders are sophisticated investors that can provide market discipline for covered entities and covered IDIs. These concerns do not apply in the case of eligible internal LTD, which by definition cannot be held by retail or outside investors.

Question 32: What would be the advantages and disadvantages of permitting all covered IDIs (or certain covered IDIs other than just mandatory or permitted externally issuing IDIs) to satisfy their LTD requirements with external LTD? If covered IDIs were able to satisfy their LTD requirements with external LTD, what would be the advantages and disadvantages of permitting any such eligible external LTD to count towards the LTD requirement of the covered IDI's consolidating parent?

Question 33: What are the advantages and disadvantages of permitting a covered IDI to issue eligible internal LTD to additional non-subsidiary affiliates, beyond consolidating parent entities?

Question 34: What are the advantages and disadvantages of limiting the types of instruments that qualify as eligible internal LTD? Which, if any, of the proposed features for eligible internal LTD instruments would not be appropriate for covered IDIs or covered IHCs and why? What characteristics of any specific types of entities required to issue internal LTD under the proposed rule would caution against requiring eligible internal LTD to meet any of the proposed eligibility requirements?

C. Special Considerations for Covered IHCs

The proposed rule would set forth certain requirements for eligible internal LTD that are specific to covered IHCs. Specifically, the proposed rule would require certain covered IHCs to issue only eligible internal LTD, where the resolution strategy of the covered IHC's foreign parent follows an SPOE model. In addition, eligible internal LTD issued by covered IHCs must include a contractual provision that is approved by the Board that provides for immediate conversion or exchange of the instrument into common equity tier 1 capital of the covered IHC upon issuance by the Board of an internal debt conversion order. Finally, eligible internal LTD issued by covered IHCs would not be subject to a prohibition on credit-sensitive features.

Only certain covered IHCs would have the option to issue debt externally to third-party investors. Specifically, covered IHCs of FBOs with a top-tier group-level resolution plan that contemplates their covered IHCs or subsidiaries of their covered IHCs entering into resolution, receivership, insolvency, or similar proceedings in the United States (resolution covered IHCs), are permitted to issue eligible LTD externally. Such resolution covered IHCs are more analogous to covered HCs, because both have established resolution plans that involve these entities entering resolution proceedings in the United States. Covered IHCs of FBOs with top-tier group-level resolution plans that do not contemplate their covered IHCs or the subsidiaries of their covered IHCs entering into resolution, receivership, insolvency, or similar proceedings (non-resolution covered IHCs) must issue LTD internally within the FBO, from the covered IHC to a foreign parent or a wholly owned subsidiary of the foreign parent.

1. Identification as a Resolution or Non-Resolution Covered IHC

This proposal would require the top-tier FBO of a covered IHC to certify to the Board whether the planned resolution strategy of the top-tier FBO involves the covered IHC or its subsidiaries entering resolution, receivership, insolvency, or similar proceedings in the United States. The certification must be provided by the top-tier FBO to the Board six months after the effective date of the final rule. In addition, the top-tier FBO with a covered IHC must provide an updated certification to the Board upon a change in resolution strategy. The proposed identification process is similar to the process used for U.S. IHCs subject to the TLAC rule.

See

12 CFR 252.164.

A covered IHC is a “resolution covered IHC” under the proposed rule if the certification provided indicates that the top-tier FBO's planned resolution strategy involves the covered IHC or its subsidiaries entering into resolution, receivership, insolvency or similar proceeding in the United States. A covered IHC is a “non-resolution covered IHC” under the proposed rule if the certification provided to the Board indicates that the top-tier FBO's planned resolution strategy does not involve the covered IHC or its subsidiaries entering into resolution, receivership, insolvency, or similar proceedings in the United States.

In addition, under the proposed rule, the Board may determine in its discretion that an entity that is certified to be a non-resolution covered IHC is a resolution covered IHC, or that an entity that is certified to be a resolution covered IHC is a non-resolution covered IHC. In reviewing certifications provided with respect to covered IHCs, the Board would expect to review all the information available to it regarding a firm's resolution strategy, including information provided to it by the firm. The Board would also expect to consult with the firm's home-country resolution authority in connection with this review. In addition, the Board may consider a number of factors including but not limited to: (i) whether the FBO conducts substantial U.S. activities outside of the IHC chain; (ii) whether the group's capital and liability structure is set up in a way to allow for losses to be upstreamed to the top-tier parent; (iii) whether the top-tier parent or foreign affiliates provide substantial financial or other forms of support to the U.S. operations (

e.g.,

guarantees, contingent claims and other exposures between group entities); (iv) whether the covered IHC is operationally independent (

e.g.,

costs are undertaken by the IHC itself and whether the IHC is able to fund itself on a stand-alone basis); (v) whether the covered IHC depends on the top-tier parent or foreign affiliates for the provision of critical shared services or access to infrastructure; (vi) whether the covered IHC is dependent on the risk management or risk-mitigating hedging services provided by the top-tier parent or foreign affiliates; and (vii) the location where financial activity that is conducted in the United States is booked.

A covered IHC would have one year or a longer period determined by the Board to comply with the requirements of the proposed rule applicable to non-resolution covered IHCs if it would become a non-resolution covered IHC because it either changes its resolution strategy or if the Board disagrees with the covered IHC's certification of its resolution strategy. For example, if the Board determines that a firm that had certified it is a resolution covered IHC is a non-resolution covered IHC for purposes of the rule, the IHC would have up to one year from the date on which the Board notifies the covered IHC in writing of such determination to

comply with the requirements of the rule. Since under the proposed rule a resolution covered IHC has the option to issue LTD externally to third parties but non-resolution covered IHCs do not, the one-year period would provide the covered IHC with time to make any necessary adjustments to the composition of its LTD so that all of its LTD would be issued internally.

As noted, under the proposed rule, the Board may extend the one-year period discussed above. In acting on any requests for extensions of this time period, the Board would consider whether the covered IHC had made a good faith effort to comply with the requirements of the rule.

2. Contractual Conversion Trigger

The proposed rule would require eligible internal LTD, whether issued by resolution covered IHCs or non-resolution covered IHCs, to contain a contractual conversion feature. The contractual trigger would allow the Board to require the covered IHC to convert or exchange all or some of the eligible internal LTD into common equity tier 1 capital on a going-concern basis (that is, without the covered IHC's entry into a resolution proceeding) under certain circumstances. These include if the Board determines that the covered IHC is “in default or in danger of default” and any of the three following additional circumstances applies.

First, the top-tier FBO or any of its subsidiaries is placed into resolution proceedings. Second, the home country supervisory authority consents to the exchange or conversion, or did not object to the exchange or conversion following 24 hours' notice. Third and finally, the Board makes a written recommendation to the Secretary of the Treasury that the FDIC should be appointed as receiver of the covered IHC under Title II of the Dodd-Frank Act.

The terms of the contractual conversion provision in the debt instrument would have to be approved by the Board.

The phrase “in default or in danger of default” would be defined consistently with the standard provided by section 203(c)(4) of Title II of the Dodd-Frank Act.

See

12 U.S.C. 5383(c)(4). Consistent with section 203's definition of the phrase, a covered IHC would be considered to be in default or in danger of default upon a determination by the Board that (A) a case has been, or likely will promptly be, commenced with respect to the covered IHC under the U.S. Bankruptcy Code; (B) the covered IHC has incurred, or is likely to incur, losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the company to avoid such depletion; (C) the assets of the covered IHC are, or are likely to be, less than its obligations to creditors and others; or (D) the covered IHC is, or is likely to be, unable to pay its obligations (other than those subject to a bona fide dispute) in the normal course of business.

See

12 U.S.C. 5383.

The Board has delegated authority to approve these triggers to the General Counsel, in consultation with the Director of the Division of Supervision and Regulation, under certain circumstances.

See

12 CFR 265.6(j).

The principal purpose of this requirement is to ensure that losses incurred by the covered IHC are shifted to a foreign parent without the covered IHC having to enter a resolution proceeding. If the covered IHC's eligible internal LTD is sufficient to recapitalize the covered IHC in light of the losses that the covered IHC has incurred, this goal could be achieved through conversion of the eligible internal LTD into equity upon the occurrence of the trigger conditions.

Eligible external LTD issued by resolution covered IHCs is not required to contain a contractual conversion trigger. The proposed rule gives resolution covered IHCs the option to issue debt externally to third-party investors under the proposed rule on the same terms as covered HCs.

Question 35: The Board maintains an expectation that, following receipt of an internal debt conversion order, the FBO parent of a covered IHC should take steps to preserve the going concern value of the covered IHC, consistent with the resolution strategy of the top-tier FBO. Accordingly, the Board would expect that, following receipt of an internal debt conversion order, a covered IHC would not make any immediate distributions of cash or property, or make immediate payments to repurchase, redeem, or retire, or otherwise acquire any of its shares from its shareholders or affiliates. Should the Board codify this expectation in the proposed rule for covered IHCs and the U.S. IHCs of global systemically important FBOs? If so, should the regulation text specify that any such distributions or payments are subject to the Board's prior approval?

3. Allowance of Certain Credit-Sensitive Features

The proposed rule would not require eligible internal LTD issued by covered IHCs to include the prohibition against including certain credit-sensitive features that applies to other eligible LTD. This would match the requirements for eligible internal LTD issued by U.S. IHCs subject to the Board's TLAC rule.

Internal LTD, which by definition is issued between affiliates, is less likely to have a credit-sensitive feature. In addition, in contrast to eligible internal LTD of covered IDIs, eligible internal LTD of a covered IHC could be converted to equity by the Board. The presence of the credit-sensitive feature for the eligible LTD of a covered IHC would be less problematic once the LTD is converted to equity.

See

12 CFR 252.161.

Question 36: What would be the advantages and disadvantages of making eligible internal LTD issued by all covered IHCs subject to the proposed rule or the TLAC rule subject to the same prohibition on credit-sensitive features that applies to eligible external LTD?

D. Legacy External LTD Counted Towards Requirements

The agencies anticipate that some covered entities and their subsidiary IDIs, as well as potentially certain other covered IDIs, will have external LTD outstanding at the time of finalization of the proposed rule. To enable covered entities and covered IDIs to most readily and effectively meet minimum LTD requirements as the proposed requirements are phased in, the proposed rule would allow some of this legacy external LTD to count toward the minimum requirements in the proposed rule, even where such legacy external LTD does not meet certain eligibility requirements. Specifically, the proposal would provide an exception for the following categories of outstanding external LTD instruments issued by covered HCs, resolution covered IHCs, and their subsidiary IDIs, and permitted and required externally issuing IDIs, that do not conform to all of the eligibility requirements that will apply to issuances of eligible internal or external LTD going forward once notice of the final rule resulting from this proposal is published in the

Federal Register

(i) instruments that contain otherwise impermissible acceleration clauses, (ii) instruments issued with principal denominations that are less than the proposed $400,000 minimum amount, and (iii) in the case of legacy instruments issued externally by a covered IDI, are not contractually subordinated to general unsecured creditors (collectively, eligible legacy external LTD). In addition, eligible legacy external LTD issued by a consolidated subsidiary IDI of a covered entity may be used to satisfy the minimum external LTD requirement applicable to its parent covered HC or resolution covered IHC, as well as any internal LTD requirement applicable to the subsidiary IDI itself. Eligible legacy external LTD cannot be used to satisfy the internal LTD requirement for nonresolution covered IHCs. To qualify as eligible legacy external LTD, an instrument must have been issued prior

to the date that notice of the final rule resulting from this proposal is published in the

Federal Register

The allowance for eligible legacy external LTD would reduce the costs of modifying the terms of existing outstanding debt or issuing new debt to meet applicable minimum LTD requirements. Over time, debt that is subject to the legacy exception will mature and be replaced by LTD that must meet all of the proposal's eligibility requirements. This approach is consistent with the intent of the legacy exceptions that were made available to entities subject to the TLAC rule in relation to LTD instruments issued prior to December 31, 2016.

See

12 CFR 252.61 “Eligible debt security.”

As noted above, the proposal would authorize the agencies, after providing a covered entity or covered IDI with notice and an opportunity to respond, to order the covered entity or covered IDI to exclude from its outstanding eligible LTD amount any otherwise eligible debt securities. These provisions would also apply to eligible legacy external LTD.

Question 37: What are the advantages and disadvantages of creating this exception for certain outstanding legacy external LTD issued by covered entities for purposes of the proposed rule?

Question 38: What are the advantages and disadvantages of establishing the date that notice of the final rule resulting from this proposal is published in the

Federal Register

as the date before which external LTD must have been issued to qualify as legacy external LTD, as opposed to the date that the rule becomes effective?

Question 39: The agencies welcome quantitative information about outstanding LTD issuances by covered entities or covered IDIs. What amount of LTD do covered entities or covered IDIs have outstanding? What amount would qualify as LTD if all the requirements applied upon finalization of the rule? What amount would qualify as LTD under the proposed exception?

VI. Clean Holding Company Requirements

To promote the resiliency of covered entities and minimize the knock-on effects of the failure of a covered entity to its counterparties and the financial system, the Board proposes to impose “clean holding company” requirements on covered entities. These requirements are similar to those imposed on U.S. GSIBs and U.S. IHCs subject to the TLAC rule.

Specifically, the proposal would prohibit covered entities from having the following categories of outstanding liabilities: third-party debt instruments with an original maturity of less than one year (short-term debt); QFCs with a third party (third-party QFCs); guarantees of a subsidiary's liabilities if the covered entity's insolvency or entry into a resolution proceeding (other than resolution under Title II of the Dodd-Frank Act) would create default rights for a counterparty of the subsidiary (subsidiary guarantees with cross-default rights); and liabilities that are guaranteed by a subsidiary of the covered entity (upstream guarantees) or that are subject to rights that would allow a third party to offset its debt to a subsidiary upon the covered entity's default on an obligation owed to the third party. Additionally, the proposal would limit the total value of a covered entity's (

i.e.,

parent-only, on an unconsolidated basis) non-eligible LTD liabilities owed to nonaffiliates that would rank at either the same priority as or junior relative to eligible LTD to 5 percent of the value of the covered entity's common equity tier 1 capital (excluding common equity tier 1 minority interest), additional tier 1 capital (excluding tier 1 minority interest), and eligible LTD amount. The proposed prohibitions and cap would apply only to the corporate practices and liabilities of the covered entity itself. They would not directly restrict the corporate practices and liabilities of the subsidiaries of the covered entity.

See

12 CFR 252.64 and .166.

As discussed further below, these provisions provide benefits independent of the resolution strategy of a covered entity, including by improving the resiliency of covered entities, limiting certain transactions that can give rise to financial stability risks before a covered entity fails, and simplifying a covered entity so that it and its relevant subsidiaries can be resolved in a prompt and orderly manner.

These provisions may also advance several goals in connection with the resolution of the covered entity. In the case of SPOE resolution, these provisions support the goal of that resolution strategy to achieve the rapid recapitalization of the material subsidiaries of a covered entity with minimal interruption to the ordinary operations of those subsidiaries. The proposed clean holding company restrictions would advance this goal by prohibiting transactions that would distribute losses that should be borne solely by a covered entity to the covered entity's subsidiaries.

In the case of an MPOE resolution, in which a covered entity and its subsidiary IDI would enter into resolution, these provisions would limit the extent to which a subsidiary of a covered entity would experience losses or disruptions in its operations as a result of the failure of the covered entity prior to and during resolution. In particular, the prohibition on covered entity liabilities that are subject to upstream guarantees or offset rights would prevent a failed covered entity's creditors from passing their losses on to the covered entity's subsidiaries. Furthermore, covered entities that currently plan for an MPOE resolution strategy may nevertheless be resolved pursuant to an SPOE resolution strategy or adopt an SPOE resolution strategy in the future. Applying the clean holding company requirements to covered entities that currently plan for an MPOE resolution ensures that the benefits of these requirements that may be more significant for covered entities with an SPOE resolution strategy are readily available to covered entities with an MPOE resolution strategy that ultimately are resolved with an SPOE resolution strategy or eventually change their resolution strategy to an SPOE strategy.

Question 40: What would be the advantages and disadvantages of imposing clean holding company requirements on covered entities? What would be the costs or consequences on business practices of imposing these requirements?

Question 41: Under the existing TLAC rule, U.S. IHCs of foreign GSIBs already comply with clean holding company requirements. What characteristics about U.S. IHCs that would be subject to the proposed rule (i.e., not subject to the existing TLAC rule), if any, would make it appropriate or inappropriate to apply such requirements?

Question 42: To what extent are the clean holding company requirements appropriate for a firm that employs an MPOE resolution strategy? What specific challenges, if any, would result from applying the clean holding company requirements to these firms?

Question 43: What changes, if any, would result to an IDI's business model if its parent company is a covered entity that becomes subject to the clean holding company requirements, where the covered entity proposes an MPOE resolution strategy?

A. No External Issuance of Short-Term Debt Instruments

The proposed rule would prohibit covered entities from externally issuing debt instruments with an original maturity of less than one year. Under the proposed rule, a liability has an original maturity of less than one year if it would provide the creditor with the option to receive repayment within one

year of the creation of the liability, or if it would create such an option or an automatic obligation to pay upon the occurrence of an event that could occur within one year of the creation of the liability (other than an event related to the covered entity's insolvency or a default related to failure to pay that could trigger an acceleration clause).

The prohibition on external issuance of short-term debt instruments would improve the resiliency of covered entities and their subsidiaries and help mitigate the financial stability risks presented by destabilizing funding runs. A covered entity with significant short-term obligations is less resilient because, in the event of real or perceived stress, short-term creditors can refuse to roll over their loans to the covered entity. In that case, the covered entity must either find replacement funding or sell assets in order to pay its short-term creditors. Both of these outcomes normally would weaken the covered entity because replacement funding is likely to be at a premium and the assets would likely be sold at a loss in order to quickly generate cash. In response to the termination or curtailment of a covered entity's short-term funding or the covered entity's asset sales, counterparties or customers of the covered entity's subsidiaries may also lose confidence in those subsidiaries and unwind transactions with or withdraw funding from them. This issue may be acute for IDIs because their main creditors—depositors—generally have the ability to demand their funds on short notice. Prohibiting external issuance of short-term debt instruments by covered entities decreases the likelihood of these outcomes, improving the resiliency of a covered entity and its subsidiaries. For example, a covered entity is better able to serve as a source of managerial and financial strength to its subsidiary IDI if the covered entity is not experiencing a run on its short-term liabilities.

Decreasing the likelihood of a funding run also benefits financial stability. The sale of assets by a covered entity to repay its short-term creditors can be a key channel for the propagation of stress through the financial system. If those assets are widely held by other firms, then the sale by a covered entity of those assets can depress the fair value of those assets, thereby significantly affecting other firms' balance sheets, which could precipitate stress at those institutions, which could require further asset sales. The proposed rule would help mitigate these financial stability risks by prohibiting covered entities from relying on short-term funding and reducing run risk.

The prohibition against short-term funding in the proposed rule applies to both secured and unsecured short-term borrowings. Although secured creditors are less likely to take losses in resolution than unsecured creditors, secured creditors may nonetheless be unwilling to maintain their exposure to a covered entity that comes under stress in order to avoid potential disruptions in access to the collateral during resolution proceedings.

Question 44: What are the advantages and disadvantages to the proposed prohibition on external issuance by covered entities of short-term debt instruments? To what extent do covered entities that would be subject to the proposed rule rely on liabilities that would be subject to this prohibition?

B. Qualified Financial Contracts With Third Parties

Under the proposal, covered HCs would be permitted to enter into QFCs only with their subsidiaries and covered IHCs would be permitted to enter into QFCs only with their affiliates, with the exception described below of entry into certain credit enhancement arrangements with respect to QFCs between a covered entity's subsidiary and third parties. The proposal defines QFCs by reference to Title II of the Dodd-Frank Act, which defines QFCs to include securities contracts, commodities contracts, forward contracts, repurchase agreements, and swap agreements, consistent with the TLAC rule.

12 U.S.C. 5390(c)(8)(D).

The failure of a large banking organization that is a party to a material amount of third-party QFCs could pose a substantial risk to the stability of the financial system. Specifically, it is likely that many of that institution's QFC counterparties would respond to the institution's default by immediately liquidating their collateral and seeking replacement trades with third-party dealers, which could cause fire sale effects and propagate financial stress to other firms that hold similar assets by depressing asset prices. The proposed restriction on third-party QFCs would mitigate this threat to financial stability for covered entities under both MPOE and SPOE strategies. In the case of a successful SPOE resolution, covered entities' operating subsidiaries, which may be parties to large quantities of QFCs, should remain solvent and not fail to meet any ordinary course payment or delivery obligations. Therefore, assuming that the cross-default provisions of the QFCs engaged in by the operating subsidiaries of covered entities are appropriately structured, their QFC counterparties generally would have no contractual right to terminate or liquidate collateral on the basis of the covered entity's entry into resolution proceedings. The proposed restrictions also would support successful MPOE resolution as they would encourage covered entities to migrate any external QFC activity currently being conducted at the covered entity level to the relevant operating subsidiaries, a structure that would be better aligned with the activities of the underlying subsidiaries and will enable, in the case of IDI subsidiaries, the direct application of statutory QFC stay provisions provided under the FDI Act with regard to such QFCs. This migration of covered entity QFCs to the subsidiary level should simplify resolution proceedings and enable continuity of necessary QFC activities in resolution. Further, a covered entity itself would have, subject to the exceptions discussed below, no further QFCs with external counterparties, if any, and so the covered entity's entry into resolution proceedings could result in limited or no direct defaults on QFCs and related fire sales, assuming the covered entity complies with the cross-default and upstream guarantee restrictions discussed below. The proposed restriction on third-party QFCs would therefore materially diminish the fire sale risk and contagion effects associated with the failure of a covered entity.

The proposal would only apply prospectively to new agreements entered into after the post-transition period effective date of a final rule. The proposed rule would also exempt certain contracts from the prohibition on third-party QFCs for covered HCs. These exemptions, which are also are being proposed for U.S. GSIBs and U.S. IHCs of foreign GSIBs, are discussed further below and would apply to certain underwriting agreements, fully paid structured share repurchase agreements, and employee and director compensation agreements.

Question 45: What are the advantages and disadvantages to the proposed prohibition on third-party QFCs? To what extent do covered entities that would be subject to the proposed rule currently enter into QFCs?

Question 46: What would be the cost or consequences on business practices of imposing a prohibition on third-party QFCs?

C. Guarantees That Are Subject to Cross-Defaults

The proposal would prohibit a covered entity from guaranteeing (including by providing credit support for) any liability between a direct or indirect subsidiary of the covered entity and an external counterparty if the covered entity's insolvency or entry into resolution (other than resolution under Title II of the Dodd-Frank Act) would directly or indirectly provide the subsidiary's counterparty with a default right. The proposal defines the term “default right” broadly. Guarantees by covered entities of subsidiary liabilities, in the case of covered HCs, and of affiliates, in the case of covered IHCs, that are not subject to such cross-default rights would be unaffected by the proposal. The proposal would only apply prospectively to new agreements established after the effective date of a final rule.

This proposal would improve the resolvability and resilience of covered entities that have adopted MPOE and SPOE strategies. The proposed requirements would support the ability of a covered entity's subsidiaries to continue to operate normally or undergo an orderly wind-down upon the covered entity's entry into resolution. For example, an obstacle to resolution would occur if a covered entity's entry into resolution or insolvency operated as a default by the subsidiary and empowered the subsidiary's counterparties to take default-related actions, such as ceasing to perform under the contract or liquidating collateral. Were subsidiary QFC counterparties to take such actions, the subsidiary could face liquidity, reputational, or other stress that could undermine its ability to continue operating normally, including by placing short-term funding strain on the subsidiary. This could have destabilizing effects, even for a subsidiary of a covered entity with an MPOE resolution strategy as it could erode the franchise or market value of the subsidiary and pose obstacles to its orderly resolution or wind-down. The proposed prohibition would also complement other work that has been done to facilitate GSIB resolution through the stay of cross-defaults, including the agencies' final rule imposing restrictions on QFCs and the ISDA Protocol.

See

12 CFR part 47 (OCC); 12 CFR 252 subpart I (Board); 12 CFR part 382 (FDIC); ISDA Universal Resolution Stay Protocol (Nov. 12, 2015),

https://www.isda.org/protocol/isda-2015-universal-resolution-stay-protocol;

ISDA 2018 U.S. Resolution Stay Protocol (Aug. 22, 2018),

https://www.isda.org/protocol/isda-2018-us-resolution-stay-protocol.

The prohibition on entry by covered entities into guarantee arrangements covering subsidiary liabilities that contain cross-default rights would exempt guarantees subject to a rule of the Board restricting such cross-default rights or any similar rule of another U.S. Federal banking agency.

For example, the proposal would exempt from this prohibition subsidiary guarantees with cross-default rights that would be stayed if the underlying contracts were subject to the Board, OCC, or FDIC's rules requiring stays of QFC default rights in certain resolution scenarios.

However, these rules currently do not apply to covered entities. Although the Board has not adopted a rule regarding cross-default provisions of financial contracts that would apply to covered entities, the proposal leaves open the possibility that in the future certain guarantees would be permitted to the extent they are authorized under a rule of the Board or another Federal banking agency.

Liabilities would be considered “subject to” such a rule even if those liabilities were exempted from one or more of the requirements of the rule.

See, e.g.,

12 CFR part 47 (OCC); 12 CFR 252 subpart I (Board); 12 CFR part 382 (FDIC).

Question 47: Would modifications to the scope of the agencies' existing QFC stay rules be necessary to support the implementation of this provision? What are the advantages and disadvantages of doing so? Should such a rulemaking permit certain guarantee arrangements to contain cross-default provisions, consistent with 12 CFR 252 subpart I?

D. Upstream Guarantees and Offset Rights

The proposed rule would prohibit covered entities from having outstanding liabilities that are subject to a guarantee from any direct or indirect subsidiary of the holding company (upstream guarantees). Both MPOE and SPOE resolution strategies are premised on the assumption that a covered entity's operating subsidiaries face no claims from the creditors of the holding company as those subsidiaries either continue to operate normally or undergo separate resolution proceedings. This arrangement could be undermined if a liability of the covered entity is subject to an upstream guarantee because the effect of such a guarantee is to expose the guaranteeing subsidiary (and, ultimately, its creditors) to the losses that would otherwise be imposed on the holding company's creditors. A prohibition on upstream guarantees would facilitate both MPOE and SPOE resolution strategies by increasing the certainty that the covered entity's eligible external LTD holders will be exposed to loss separately from the creditors of a covered entity's subsidiaries.

Upstream guarantees do not appear to be common among covered entities. Section 23A of the Federal Reserve Act already limits the ability of an IDI to issue guarantees on behalf of its parent holding company.

The principal effect of the prohibition would therefore be to prevent the future issuance of such guarantees by material non-bank subsidiaries.

Transactions subject to the quantitative limits of section 23A of the Federal Reserve Act and Regulation W include guarantees issued by a bank on behalf of an affiliate.

See

12 U.S.C. 371c(b)(7)(E); 12 CFR 223.3(h)(5).

Similarly, the proposed rule prohibits covered entities from issuing an instrument if the holder of the instrument has a contractual right to offset the holder's liabilities, or the liabilities of an affiliate of the holder, to any of the covered entity's subsidiaries against the covered entity's liability under the instrument. The prohibition includes all such offset rights regardless of whether the right is provided in the instrument itself. Such offset rights are another device by which losses that are expected to flow to the covered entity's external LTD holders in resolution could instead be imposed on operating subsidiaries and their creditors.

E. Cap on Certain Liabilities

For covered HCs, the proposed rule would limit the amount of non-contingent liabilities to third parties (

i.e.,

persons that are not affiliates of the covered entity) that are not eligible LTD, common equity tier 1 capital, or additional tier 1 capital and that would rank at either the same priority as or junior to the covered entity's eligible LTD in the priority scheme of either the U.S. Bankruptcy Code or Title II of the Dodd-Frank Act to no more than 5 percent of the sum of a covered HC's common equity tier 1 capital (excluding common equity tier 1 minority interest), additional tier 1 capital (excluding tier 1 minority interest), and eligible LTD amount.

The cap would not apply to instruments that were eligible external LTD when issued and have ceased to be eligible (because their remaining maturity is less than one year) as long as the holder of the instrument does not have a currently exercisable put right; nor would it apply to payables (such as dividend- or interest-related payables) that are associated with such liabilities (related liabilities). Liabilities that would be expected to be subject to the cap include debt instruments with derivative-linked features (

i.e.,

structured notes); external vendor and

operating liabilities, such as for utilities, rent, fees for services, and obligations to employees; and liabilities arising other than through a contract (

e.g.,

liabilities created by a court judgment) (collectively, unrelated liabilities).

See

11 U.S.C. 507; 12 U.S.C. 5390(b).

The purpose of this requirement is to limit the amount of liabilities that are not common equity tier 1 capital, additional tier 1 capital, or eligible LTD that would rank at either the same priority as or junior relative to eligible LTD in a bankruptcy or resolution proceeding. This ensures that eligible LTD absorbs losses prior to almost all other liabilities of the covered entity and mitigates the legal risk that non-LTD creditors of a failed covered entity object to or otherwise complicate the imposition of losses in bankruptcy on the class of creditors that includes the eligible LTD of the covered entity. As a practical matter, the cap also would result in a significant portion of a covered entity's unsecured liabilities being composed of eligible LTD, which is preferable because eligible LTD has the features discussed above that more readily absorb loss and facilitate a simpler resolution relative to other types of unsecured debt.

The proposal would not subject a covered entity to this cap if the covered entity elects to subordinate all of its eligible LTD to all of the covered entity's other liabilities. Subordinating all of a covered entity's eligible LTD also would address the risk that non-LTD creditors might object to or otherwise complicate imposing losses on investors in eligible LTD. Permitting covered entities a choice between adhering to the cap on unrelated liabilities or instead contractually subordinating all eligible LTD to all of the covered entity's other liabilities provides greater flexibility in choosing how to comply with the proposed rule.

The proposed calibration of 5 percent is consistent with the 5 percent calibration for the similar cap on unrelated liabilities that applies to the parent holding companies of U.S. GSIBs and U.S. IHCs of foreign GSIBs.

Like the cap for U.S. GSIBs and the U.S. IHCs of foreign GSIBs, the proposed cap for a covered entity would be specified as a percentage of the sum of the covered entity's common equity tier 1 capital, additional tier 1 capital, and eligible LTD amount. The proposed 5 percent cap would apply to the parent-only balance sheets of covered entities. Specifically, Board staff estimates that, on average, the amount of liabilities that would be subject to this cap as a percentage of the sum of a firm's tier 1 capital and minimum LTD requirement under the proposal would be less than the proposed 5 percent cap.

See

12 CFR 252.64(b)(1) (cap on unrelated liabilities for U.S. GSIBs); 12 CFR 252.166(b)(1) (cap on unrelated liabilities for U.S. IHCs of foreign GSIBs).

Estimated to be approximately 4.6 percent. Calculated by dividing the average of the numerator and denominator for covered HCs and covered IHCs. The liabilities included in the numerator for this calculation are reported, as of December 31, 2022, as line items 13 and 17 from the FR Y-9LP. The tier 1 capital and total consolidated asset amount used to estimate the minimum LTD requirement for the denominator are from line items HC-R.26 and HC-R.46.a of the FR Y-9C, respectively.

Under the proposed rule, the set of liabilities that would count towards the unrelated liabilities cap for a resolution covered IHC would be different than the liabilities that would count towards the cap for non-resolution covered IHCs (discussed below) because resolution covered IHCs are permitted to issue eligible LTD externally to third parties. The cap for resolution covered IHCs applies to unrelated liabilities owed to parent and sister affiliates, as well as to unaffiliated third parties, because these IHCs have the option to issue external LTD that will be expected to bear losses in the resolution covered IHC's individual resolution proceeding and that may rank at either the same priority as or senior to such unrelated liabilities. Thus, these firms may owe significant amounts of unrelated liabilities to their FBO parents or another affiliate that would remain outstanding when the IHC enters resolution, because such entities are not anticipated to support the IHC under the resolution plan of the parent FBO.

The cap on unrelated liabilities owed to parents and sister affiliates limits the amount of these liabilities that would be outstanding at the time that a resolution covered IHC enters into resolution.

This inclusion of liabilities owed to parents of the resolution covered IHC also aligns with the cap on liabilities of covered HCs, which would include liabilities held by shareholders of the covered HC.

The cap on unrelated liabilities for non-resolution covered IHCs does not include liabilities owed to foreign affiliates because for such entities, the eligible LTD held by foreign affiliates should, in a resolution scenario, convert to equity of the covered IHC, either through actions of the parent or the Board. Therefore, in contrast to resolution covered IHCs, concern about liabilities owed to the FBO parent or other affiliated parties is minimal.

Question 48: What would be the advantages and disadvantages of the proposed cap on unrelated liabilities? Could the objectives of the cap be achieved through other means? For example, instead of imposing a cap on unrelated liabilities, should the Board require that the LTD required under this rule

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