A rule designed to boost banking regulators’ abilities to resolve non-global systemically important banks (GSIB) “in an orderly way” should they fail was unveiled Friday by the Federal Reserve.
The proposal was also accompanied by divergent comments from several Federal Reserve Board members.
The agency said its advance notice of proposed rulemaking (ANPR) seeks comments on potential new requirements – including a long-term debt requisite – and resources that would be used for an orderly resolution of large institution. A large institution is generally defined as a domestic bank holding company, or domestic savings and loan holding company, that has $100 billion or more in total consolidated assets but is not a GSIB (global systemically important bank) under the Fed’s capital rule.
“Recent merger activity and organic growth have increased the size of large banking organizations,” the Fed said in a release. “If they were to fail, their large size could complicate efforts by regulators to resolve the firms without disruption to customers and counterparties.”
According to Fed Board Vice Chair for Supervision Michael Barr, the agency is also evaluating whether capital requirements for large banks, including GSIBs, and other elements of the prudential framework should be updated.
The proposal was developed, the Fed said, in conjunction with the Federal Deposit Insurance Corp. (FDIC) and issued for a 60-day comment period beginning upon publication in the Federal Register.
The proposal is, however, controversial among the Fed Board members, three of whom issued statements accompanying the agency’s notice.
Gov. Michelle Bowman, who serves as the community bank representative on the board, noted the costs and unintended consequences of the proposal. “For example, the ANPR solicits feedback on whether large banking organizations should be required to issue more long-term debt, which could be ‘bailed in’ to improve resolvability. Increased reliance on long-term debt funding could adversely impact the cost and availability of credit,” she said.
Board Vice Chair Lael Brainard, on the other hand, was supportive of the proposal. “The increases in banking concentration in the $250-700 billion asset size category raise concerns,” she said. “Since we know from experience that even noncomplex banks in that range can pose risks to the broader financial system when they experience financial distress, I am encouraged that the Board is seeking comment on an advance proposal to improve their resolvability through long-term debt requirements and is undertaking a serious review of large bank capital requirements.”
Gov. Christopher Waller, however, was less than sanguine about the ANPR. “While I support issuing an advance notice of proposed rulemaking to solicit public comment on the appropriateness of certain resolution-related requirements for large banks, that does not mean I support or oppose applying such requirements to those banks. I look forward to reviewing the comments received.”