# 88 FR 64524: Long-Term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions > Federal · Regulations · In force URL: https://www.frixlaw.com/law-library/statutes/FR_PRORULE_2023-19265 ## Section - **Citation:** 88 FR 64524 - **Heading:** Long-Term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions - **Jurisdiction:** Federal - **Kind:** Regulations - **Status:** In force - **Text as of:** August 14, 2026 - **Source:** Compiled text - **Location:** Federal Register / Vol. 88 / 88 FR 64524 ## Text 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 s 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 ing 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 g 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 een 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 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 , 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 nimum 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 es 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. 1 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). 1 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 2 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 overed 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. 2 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 stic 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. 3 Following the 2008 financial crisis, the reliance of covered entities on uninsured deposits grew dramatically. 4 This increased reliance on uninsured deposit funding has given rise to vulnerabilities at these banking organizations. 3 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 ic 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. 4 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. 5 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 vent 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. 5 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 nd 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. 6 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. 7 As recent 6 See 12 U.S.C. 1823(c)(4). 7 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 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 , 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, 8 some of which experienced higher than normal deposit outflows during this time. 9 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. 8 Regional banking organizations generally are considered those with total consolidated assets between $10 billion and $100 billion. See, e.g., SVB Report. 9 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 ould 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 ank 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 y 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. 10 10 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. 11 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. 12 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 11 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 trolled 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 11 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. 12 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” 13 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 hat 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. 13 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. 14 14 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 d 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. 15 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. 15 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 ://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 ltiple 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. 16 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. 16 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 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 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). 17 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. 18 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. 19 A Category IV covered entity is one that has at least $100 billion in average total consolidated assets. 20 17 12 CFR 252.2 (BHCs and U.S. IHCs under Regulation YY); 12 CFR 238.2(cc)-(ee) (SLHCs under Regulation LL). 18 12 CFR 252.5(c) (BHCs and IHCs); 12 CFR 238.10(b) (SLHCs). 19 12 CFR 252.5(d) (BHCs and IHCs); 12 CFR 238.10(c) (SLHCs). 20 12 CFR 252.5(e) (BHCs and IHCs); 12 CFR 238.10(d) (SLHCs) y IV covered entity is one that has at least $100 billion in average total consolidated assets. 20 17 12 CFR 252.2 (BHCs and U.S. IHCs under Regulation YY); 12 CFR 238.2(cc)-(ee) (SLHCs under Regulation LL). 18 12 CFR 252.5(c) (BHCs and IHCs); 12 CFR 238.10(b) (SLHCs). 19 12 CFR 252.5(d) (BHCs and IHCs); 12 CFR 238.10(c) (SLHCs). 20 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, 21 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. 21 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 idated 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 tics 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) 22 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. 22 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. 23 Section 165 does not prohibit the application of standards to SLHCs and BHCs pursuant to other statutory authorities. 24 23 12 U.S.C. 5365(a)(1). 24 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. 25 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 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. 25 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. 25 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 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 26 3.5 percent of its average total consolidated assets, 27 and 2.5 percent of its total leverage exposure if the covered entity is subject to the supplementary leverage ratio rule. 28 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. 26 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. 27 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). 28 See 12 CFR 217.10(c)(2). The proposed eligible LTD requirement was calibrated primarily on the basis of a “capital refill” framework sets and advanced approaches total risk-weighted assets, if applicable. 27 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). 28 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. 29 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 ause 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. 29 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. 30 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. 30 Covered entities are not subject to a buffer requirement corresponding to their leverage ratio or SLR requirement ith 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. 30 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 31 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) 32 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. 31 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. 32 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 ld 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. 32 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 y 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 33 33 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 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 e 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 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 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 ity 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 ceeds 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 34 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). 34 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 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. 35 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. 35 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 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. 35 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 er 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 ed 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 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 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 na t 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, 36 and 2.5 percent of its total leverage exposure if the covered IDI is subject to the supplementary leverage ratio. 37 36 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). 37 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 or 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). 37 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 . 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. 38 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. 38 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. 39 39 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 ble LTD any otherwise eligible debt securities with features that would significantly impair the ability of such debt securities to absorb losses in resolution. 39 39 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 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 s d 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 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. 40 40 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. 41 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. 41 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) requirement. Tier 2 capital that meets the definition of eligible external LTD would continue to count toward the external LTD requirement. 41 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. 42 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. 42 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 ntities 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 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 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 ible 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 trictions 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 lude 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. 43 43 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 rnal 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, 44 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. 44 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. 45 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 oupon 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. 45 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 45 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 haracterized 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, 46 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. 46 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 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 eless, 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 ent 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. [Text truncated at 120,000 characters. 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Airplanes](https://www.frixlaw.com/law-library/statutes/FR_PRORULE_2023-00130.md) --- Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/FR_PRORULE_2023-19265. Check the current official text before relying on it. Not legal advice.