Fed to Propose Contentious New Capital, Debt Plan

WASHINGTON – The Federal Reserve Board will hold a public meeting Oct. 30 to discuss a proposal that would require the largest and most systemically risky banks to hold capital and unsecured debt to protect taxpayers from issuing bailouts if they should become distressed.

The plan, which involves requiring banks to have “total loss absorbing capacity,” would mandate that globally systemically important banks hold reserve capital and long-term unsecured debt that can be used to recapitalize a successor bank if the existing institution fails. A framework plan was issued last November by the international Financial Stability Board. The TLAC proposal, along with new liquidity requirements, are key pillars in the sweeping post-crisis capitalization regime envisioned by Basel III.

The TLAC concept works by requiring banks to hold a certain amount of unsecured debt and a ratio of capital relative to risk-weighted assets. If a bank fails, the TLAC unsecured debt it converted into a stake in the successor bank, while the capital would be used to jump-start the successor bank’s balance sheet. The FSB proposal laid out a minimum TLAC that would amount to between 16-20% of a bank’s total risk-weighted assets, though Fed Gov. Daniel Tarullo has suggested that the U.S. central bank may go even further in its requirements.

Banks have already bristled at the FSB rule, saying that requiring capital in excess of what is necessary to resolve a troubled bank could actually impair the global financial system rather than protect it. Public interest groups, meanwhile, said that regulators should view the FSB proposal as “a floor, not a ceiling” for individual national rules.

In addition to the TLAC proposal, the Fed will also vote on an interagency rule laying out margin requirements for uncleared swaps – a rule that was approved Oct. 22 by the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.