On August 29, 2023, the Federal Reserve, the FDIC, and the OCC (the “Agencies”) issued a proposed rule that would require certain depository institution holding companies, certain U.S. intermediate holding companies (“IHCs”) of foreign banking organizations (“FBOs”), and certain insured depository institutions (“IDIs”) to have minimum levels of outstanding long-term debt (“LTD”). The Agencies maintain that the requirements would “improve the resolvability of [these banking organizations] because LTD can be used to absorb loss and create equity in resolution.” The Agencies further explain that imposing the LTD requirement at the IDI level “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 [Federal Deposit Insurance Act’s] least-cost requirement.”
By proposing to extend the LTD requirements to banking organizations in Categories II through IV of the tailoring framework, the Agencies are continuing to revise the prudential framework for “large” banking organizations to align the prudential standards applicable to non-global systemically important banks (“GSIBs”) with $100 billion or more in total consolidated assets to those for GSIBs. In this way, the proposed rule is similar to the Agencies’ recent proposal to implement the “Basel III Endgame” capital requirements, which proposes to apply the same requirements for calculating regulatory capital and risk-weighted assets (“RWAs”) to banking organizations in Categories I through IV. In this regard, Federal Reserve Governor Michelle Bowman expressed concern that “collapsing Categories II, III, and IV into a single prudential category may call into question whether the Federal Reserve is complying with the statutory requirements to tailor prudential requirements for large firms.” Similarly, FDIC Vice Chairman Travis Hill noted that the Agencies are “required by law to tailor enhanced prudential standards for large firms.” Governor Bowman also argued that failing to tailor the proposed LTD requirements “could result in the need for large firms to grow through acquisition to achieve the necessary economies of scale to comply with increased regulatory requirements.” Vice Chairman Hill also questioned whether, for IDI-centric domestic bank holding companies, the LTD requirement should apply only at the IDI level and the IDIs should be permitted to issue their LTD externally or internally. Notwithstanding these concerns, the Federal Reserve and FDIC approved the proposed rule unanimously, and comments are due by November 30, 2023.