On August 29, the Board of Governors of the Federal Reserve System (Federal Reserve), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (collectively, the agencies) issued a notice of proposed rulemaking with request for public comment on a proposal that would require banks with total assets of $100 billion or more to maintain a layer of long-term debt. The stated objective of the proposed rule is to “improve the resolvability of these banking organizations in case of failure, reduce costs to the Deposit Insurance Fund, and mitigate financial stability and contagion risks by reducing the risk of loss to uninsured depositors.” This proposal follows an advance notice of proposed rulemaking issued in October 2022 by the Federal Reserve and the FDIC that looked at several possible changes, including a long-term debt requirement to promote more orderly resolutions for large banks.

The recent bank failure of three banks is driving the agencies desire to impose long-term debt requirements on large banks as a way to mitigate future risk of disruption to the overall banking system. The agencies’ proposal would not materially change the requirements already in place for the largest and most complex banks — known as GSIBs (U.S. global systemically important banks) and it would not apply to community banks.

Highlights from the agencies’ fact sheet include:

• All large banks with total assets of $100 billion or more would be subject to long-term debt requirements and certain “clean holding company” requirements.
• Impacted large banks would be required to maintain a minimum amount of eligible long-term debt equal to the greater of:
  • 6% of risk weighted assets,
  • 5% of average total consolidated assets, and
  • 5% of total leverage exposure under the supplementary leverage ratio (for banks subject to the supplementary leverage ratio).
• The proposal would also: (i) prohibit large banks from engaging in certain activities that could complicate their resolution; and (ii) disincentivize banks from holding long-term debt issued by other banks to reduce interconnectedness.

In the agencies’ view, because large banks already maintain substantial amounts of long-term debt, most banks would only need to incrementally issue new long-term debt to meet the requirements of the proposal. Consequently, when factoring in the levels of pre-existing long-term debt, the agencies estimate that impacted large banks would likely have approximately 75% of the required amount of long-term debt under the proposal. Assuming the agencies’ estimate is accurate, impacted large banks would then have a three-year transition period following the effective date of any new rule to satisfy the remaining 25% long-term debt target under the proposed rule.

The agencies have invited public comment on the implications and interaction of the proposal with other existing rules and notices of proposed rulemaking. In particular, the agencies would like impacted banks to comment on how the proposed changes to the current capital rules (i.e., the proposal to strengthen capital requirements for large banks issued on July 23, 2023) would affect the advantages and disadvantages of the proposed rule regarding long-term debt.

Comments on the proposal will be accepted until November 30, 2023.