At the beginning of April, United States bank regulators proposed a rule that would effectively discourage large banks from purchasing the total loss-absorbing capacity debt (“TLAC”) of fellow large banks. The proposal from the Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency would require the bank purchasing the TLAC to hold additional capital against that investment and require those banks to publicly report how much of that debt they have outstanding, thus heavily discouraging banks from holding large quantities of TLAC debt obtained by fellow banks.
Under rules established in 2008 following the financial crisis banks are required to issue TLAC debt, which was aimed at ensuring banks can quickly access more equity if pushed to bankruptcy. Which in turn lowers the odds that taxpayers would need to bail them out. The flaw there, regulators worry, is that if large banks like JPMorgan Chase, Goldman Sachs and Citigroup simply bought up each other’s debt, it could weaken that safeguard should a broad future crisis hit multiple global banks at once.
The world of banking is heavily regulated and continuously being updated and changed. If you need assistance in understanding new policies and regulations, contact the experienced attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.