Unveiling yet another effort to end taxpayer bailouts of large banks, the Board of Governors of the Federal Reserve has proposed an increase in the loss absorbing capacity of systemically important U.S. bank holding companies and the domestic operations of systemically important foreign banks. The proposed rule includes disclosure requirements and limits on the ability of the largest bank holding companies to issue short-term debt.

The total loss-absorbing capacity (TLAC) proposal requires covered institutions to maintain a minimum amount of long-term debt that could be converted into equity in the event of a failure. “The proposal, combined with our other work to improve the resolvability of systemic banking firms, would substantially reduce the risk to taxpayers and the threat to financial stability stemming from the failure of these firms,” Federal Reserve Chair Janet Yellen said in a statement that accompanied Friday’s 5-0 vote. “The proposal is another important step in addressing the ‘too big to fail’ problem.”

The proposed rule also requires the parent holding company of a domestic GSIB (global systemically important bank holding company) to avoid entering into certain financial arrangements that would create obstacles to an orderly resolution. These "clean holding company" requirements would include bans on the issuance of short-term debt to external investors and on entering into derivatives and certain other types of financial contracts with external counterparties. The moves are intended to reduce the risk of destabilizing funding runs at the holding company, reduce holding company complexity, and enhance the resiliency of operating subsidiaries during an orderly resolution. 

Domestic GSIBs would be required to hold: long-term debt amount of the greater of 6 percent plus its GSIB surcharge of risk-weighted assets and 4.5 percent of total leverage exposure; and a TLAC amount of the greater of 18 percent of risk-weighted assets and 9.5 percent of total leverage exposure.

The U.S. operations of foreign GSIBs generally would be required to hold” a long-term debt amount of the greater of 7 percent of risk-weighted assets and 3 percent of total leverage exposure and 4 percent of average total consolidated assets; and a TLAC amount of the greater of 16 percent of risk-weighted assets and 6 percent of total leverage exposure and 8 percent of average total consolidated assets.

The eight firms currently identified as U.S. GSIBs are Bank of America, Bank of New York Mellon Corporation, Citigroup, Goldman Sachs Group, JP Morgan Chase, Morgan Stanley, State Street, and Wells Fargo. It is estimated that at least six of those banks will need to raise an additional $120 billion in long-term debt to comply with the rule.

Comments on the proposal will be accepted through Feb. 1, 2016. Once final, the new requirements would be phased in between Jan. 1, 2019 and Jan. 1, 2022.

In other business, the Board of Governors finalized a rule intended to reduce the risks that derivatives pose to financial stability by requiring bank swap dealers to collect and post margin on most of their swaps that are not centrally cleared. The rule establishes minimum margin requirements for un-cleared swaps that are higher than those for cleared swaps, providing market participants with an incentive to shift derivatives activity to central clearinghouses, thereby enhancing market resilience and transparency.