The Board of Governors of the Federal Reserve System ("FRB") adopted a final rule to require U.S. top-tier bank holding companies, identified as global systemically important banking organizations ("GSIBs"), to maintain outstanding a minimum amount of loss absorbing instruments, including a minimum amount of unsecured long-term debt which can be converted to equity during resolution. The rule applies both to domestic firms and the U.S. operations of foreign GSIBs.
In addition to the loss absorbing requirement, the final rule also will require the parent holding company of a domestic GSIB to avoid entering into certain financial arrangements that would create obstacles to an orderly resolution. These "clean holding company" requirements will include bans on issuance of short-term debt to external investors and on entering into derivatives and certain other types of financial contracts with external counterparties.
According to the FRB, the rule is intended to help government authorities "resolve in an orderly way the largest domestic and foreign banks operating in the United States without any support from taxpayer-provided capital." According to the FRB, notable changes from the proposal include the following:
All firms will be required to comply with the rule by January 1, 2019.
Stanley Fischer, Vice Chair of the Board of Governors of the Federal Reserve System, described steps taken by the Federal Reserve and other U.S. regulators to improve the resolution process for global systemically important banking organizations.
The Board of Governors of the Federal Reserve System proposal that certain systemically important bank entities be subject to restrictions regarding the terms of their non-cleared qualified financial contracts was published in the Federal Register.
Several financial services associations submitted comments to the Board of Governors of the Federal Reserve System in response to a proposal to impose total loss-absorbing capacity, long-term debt and related "clean holding company" requirements on global systemically important banking groups.
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