Long-term debt proposal gets more time allotted for comments, with deadline now set for Jan. 16

An extended comment period for the long-term debt proposed rule was issued Wednesday by federal banking regulators, pushing the date Jan. 16, the agencies said in a release.

The Federal Reserve, Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC) said the extension of the comment period, which had been set to expire Nov. 30, was enacted to “the improve the resolvability of large banks and enhance financial stability.”

The long-term debt proposal was issued in August; it is intended to cover large bank holding companies, certain intermediate holding companies of foreign banking organizations, and large insured depository institutions. It creates a requirement for the retention of a minimum amount of long-term debt by the covered institutions.

According to FDIC Board Chairman Martin Gruenberg (speaking in August before the proposal was issued), each covered bank under the proposal would be required to issue long-term debt sufficient to recapitalize the bank in resolution. He said that even if regional banks already have some outstanding long-term debt, the new proposal will likely require issuance of new debt.

“Such a long-term debt requirement bolsters financial stability in several ways,” Gruenberg maintained. “It absorbs losses before the depositor class – the FDIC and uninsured depositors – take losses. This lowers the incentive for uninsured depositors to run. Even if the institution fails, the buffer of long-term debt reduces cost to the Deposit Insurance Fund, and makes it more likely that a closing weekend sale could comply with the statutory least-cost test and avoid the need for a systemic risk exception.

“Further, it creates additional options in resolution, such as recapitalizing the failed bank under new ownership or breaking up the bank and selling portions of it to different acquirers, as an alternative to a merger with another large institution,” he said.

Agencies extend comment period on proposed rule to require large banks to maintain long-term debt