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Financial Services Law Insights and Observations

Fed, FDIC to consider enhancing large bank resolution requirements

Bank Regulatory Federal Issues Agency Rule-Making & Guidance Federal Reserve FDIC GSIBs OCC CFPB

On October 18, the FDIC Board of Directors approved the publication of an advance notice of proposed rulemaking (ANPRM) seeking comments on whether new requirements should be drafted to enhance the regulators’ ability to resolve large banks in an orderly way should they fail. The jointly proposed FDIC/Federal Reserve Board ANPRM seeks feedback on several new possible requirements, including a long-term debt requirement, that could be used for the orderly resolution of domestic large banking organizations in Categories II and III (which generally exceed a threshold of $250 billion in total consolidated assets) to help prevent customer and counterparty disruption. According to a Fed memo, the regulators are exploring whether certain bank resolution standards applicable to global systemically important banks (GSIBs) should be extended to other large banks that, while not as large as GSIBs, “could have very large or complex operations” and have expanded in size due to mergers and “organic growth.” The ANPRM, among other things, also seeks comment on the costs associated with such a proposal, recognizing that “a long-term debt requirement could impact the cost and availability of credit.” The regulators are also evaluating whether they should establish separability requirements, “such as the sale, transfer, or disposal of significant assets, portfolios, legal entities or business lines on a discrete product line or regional basis,” for some or all large banks to aid recovery or resolvability. Comments on the ANPRM are due within 60 days following publication in the Federal Register.

“As the banking system changes, policymakers must continuously evaluate whether resolution-related standards and prudential standards for large banks keep pace,” Fed Vice Chair for Supervision Michael S. Barr said in an announcement issued by the Fed earlier in the week. He explained that the regulators are evaluating whether capital requirements for large banks (including GSIBs), as well as other elements of the prudential framework, should be updated.

Expressing support for the joint ANPRM, acting Comptroller of the Currency Michael J. Hsu stressed that “[e]xploring the development of a rule that can ensure the resolvability of large, domestically-systemic banks will promote financial stability by guarding against the rise of non-GSIBs that may become too-big-to-fail, while enabling true competition amongst the largest banks.” CFPB Director and FDIC Board Member Rohit Chopra also expressed his support for the ANPRM. However, Chopra cautioned that if rulemaking is pursued, it “should not serve as a rationale for continuing a lax and opaque merger review process.” Chopra also advised that efforts “to reduce the risk of bailouts or increased concentration upon the failure of domestic systemically important banks should be complemented by efforts to reduce the probability of their failure,” and that the “increased attention on domestic systemically important banks should not be interpreted to mean that it is ‘mission accomplished’ when it comes to” GSIBs.