Risk & Compliance

Fed Adopts Bank Bailout Prevention Rule

The total loss-absorbing capacity rule is "one of the last critical safeguards that make up the core" of the Fed's post-financial crisis reforms.
Matthew HellerDecember 20, 2016
Fed Adopts Bank Bailout Prevention Rule

The U.S. Federal Reserve has added a rule to its bailout-prevention regulatory package that requires the eight largest banks to maintain a minimum amount of long-term debt.

The Fed board voted 5-0 to adopt the final version of the total-loss absorbing capacity rule, known as TLAC, which will increase the funding costs of globally systemically important banks by a total of between $680 million and $2 billion annually.

According to the Fed, four of the banks would have to issue new debt or equity totaling about $70 billion to comply with the rule, an estimate that is down from about $120 billion a year ago.

The rule is “one of the last critical safeguards that make up the core of our post-financial crisis reform efforts,” Fed Chair Janet L. Yellen said in a statement.

The Fed said the TLAC requirements “build on, and serve as a complement to” regulatory requirements that are intended to ensure that a bank has sufficient capital to remain a going concern. The objective of TLAC “is to reduce the financial stability impact of a failure by requiring companies to have sufficient loss-absorbing capital on both a going concern and a gone-concern basis,” it said.

The minimum level of total loss-absorbing capacity can be met with both regulatory capital and long-term debt.

In the event of a bank’s insolvency, Fed Governor Daniel K. Tarullo noted, 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 Wall Street Journal said the rule was emblematic of the bailout-prevention efforts of Yellen and other regulators, which, instead of breaking up big banks, “have essentially set up a system that acts as a sort of tax on their size.”