The US Federal Reserve has issued a rule that requires the nation’s banks to hold sufficient debt reserves to resolve in an orderly way without any taxpayer-funded bailout during a potential collapse.
Under the new rule, domestic global systemically important banks (GSIBs) and US branches of foreign GSIBs would be required to satisfy a new total loss-absorbing capacity (TLAC).
The rule mandates banks to maintain adequate amounts of long-term debt that can be converted to equity to support banks’ critical operations during resolution.
Federal Reserve governor Daniel Tarullo said. "By definition, at that point equity capital will either be totally lost, or at least below the level markets have historically required for a financial intermediary to be credible. The long-term debt required by this proposal would survive the disappearance of a bank's equity and resultant failure, and would be available for conversion into new equity."
The rule also restricts a domestic GSIB’s parent from issuing short-term debt to external investors and signing derivatives and certain other types of financial contracts with external counterparties.
Federal Reserve chair Janet Yellen said: "The rule is guided by common sense principles: bank shareholders and debt investors should place their own money at risk so depositors and taxpayers are well protected, and the biggest banks must bear the costs that come with their size."
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Firms will be required to adhere to the new rule by 1 January 2019.