Long-Term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions

As previously announced on August 29, 2023 (EventID 22852), the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FED), and the Federal Deposit Insurance Corporation (FDIC) (collectively referred to as the „agencies“ or „regulators“) have now published in the Federal Register proposed rule amendments to require certain large depository institution holding companies, U.S. intermediate holding companies of foreign banking organizations (referred to as large banking organizations or LBOs), and specific insured depository institutions (IDIs) to establish and maintain a minimum amount of long-term debt (LTD). Such debt typically includes instruments that can be converted into equity such as contingent convertible bonds, may be written down, or have a subordinated debt ranking and helps reduce the risk of financial institutions in case of financial stress.
The primary objective of this LTD requirement is to enhance the resolvability of these LBOs and IDIs. The measure is also expected to reduce costs to the Deposit Insurance Fund and mitigate contagion and financial stability risks by minimizing the potential losses incurred by uninsured depositors. Finally, the measure seeks to align the LTD requirement of other large banking organizations with those of global systemically important banking organizations (GSIBs) which already face stringent requirements as to the holding of LTD.
As we have already described the key provisions of the proposal in quite some detail in above noted Event, we refrain from repeating all provisions. In brief, however, the regulators would, among others
– implement the new LTD requirement on institutions with more than $100 billion in total consolidated assets;
– require the minimum LTD to be calculated as the largest of 6% of risk weighted assets, 3.5% of average total consolidated assets, and – for banks subject to the supplementary leverage ratio – 2.5% of total leverage exposure under the supplementary leverage ratio;
– stipulate that LTD has to be issued externally with some exceptions for IDIs;
– require approval from the Federal Reserve when redeeming or repurchasing eligible LTD;
– set out stringent LTD instrument criteria, such as being unsecured, plain vanilla, governed by U.S. law, contractually subordinated, and having a maturity exceeding one year; and
– provide for a three year transition period to phase in the new LTD requirements.
Also, certain banks would be required to deduct investments in other banks‘ LTD that exceed specific thresholds.