Fed’s top supervisor indicates ‘living will’ guidance for U.S., foreign banks to be reconsidered

The Federal Reserve will be “in the near future” seeking public comment on its “living will” guidance for U.S. and foreign firms, the central bank’s top supervisor said Wednesday.

Federal Reserve Vice Chairman for Supervision Randal Quarles, speaking at a symposium about financial regulatory protectionism in the global banking system sponsored by Harvard Law School in Cambridge, Mass., said the Federal Reserve believes that its requirements for U.S. intermediate bank holding companies (IHCs) are appropriate for foreign banks with large U.S. operations. (Under Fed rules, foreign banks are required to hold its U.S. subsidiaries through a U.S.IHC.)

“However, in light of our experience with these structures, I believe we should consider whether the internal TLAC (total loss absorbing capacity) for IHCs could be adjusted to reflect the practice of other regulators without adversely affecting resolvability and U.S. financial stability,” said Quarles. “The current calibration is at the top end of the scale set forth by the FSB (financial stability board), and willingness by the United States to reconsider its calibration may prompt other jurisdictions to do the same, which could better the prospects of successful resolution for both foreign G-SIBs operating in the United States, and for U.S. G-SIBs operating abroad.”

Alternatively, he added, it may be possible to streamline the elements of the U.S. resolution loss absorbency regime, which he said includes both TLAC and long-term debt requirements. “I will be recommending to my colleagues that we look closely at these possibilities in the coming weeks and seek comment on ways to further improve this framework,” he added.

In other comments, the Fed vice chairman said that “maximizing the efficient flow of capital across the globe” should “remain a paramount goal” of financial institution regulators. However, he added that to enable cooperation and avoid a destabilizing seizure of assets by host regulators, “I would submit that all jurisdictions must find a balance of flexibility for the parent bank and certainty for local stakeholders.”

Speech by Vice Chairman Quarles on finding the right balance in cross-border resolution