Increasing concentration in the $250-$700 billion asset size prompts regulators to consider changes to LBO resolution requirements
KPMG Insights. The FRB has identified a “rigorous review” of resolution plans in light of the increasing concentration of non-GSIB institutions (specifically, institutions with the $250 billion to $700 billion in total assets) as one its “near term goals.” Notably, this review is being conducted alongside active reviews of large bank capital requirements and potential updates to other prudential standards. Proposed new capital standards are expected to be released “as soon as possible” though industry participants have expressed concern that increased capital requirements will restrict credit in a weakened economy. The FRB is also reviewing bank merger analysis, focusing on concentration, competition, community/consumer impacts, and financial stability. These areas are linked through the FRB’s tiering framework for enhanced prudential standards.
The Federal Reserve Board (FRB) and the Federal Deposit Insurance Corporation (FDIC) jointly issued an ANPR seeking public comment on potential changes to the resolution-related rules and guidance applicable to large banking organizations (LBOs) that are not global systemically important banking organizations (GSIBs) and also their insured depository institution subsidiaries (IDIs). In general, the agencies are considering whether to apply to LBOs and their IDIs certain more stringent resolution requirements that are now applicable only to GSIBs. (See tiering framework below.)
The agencies state that non-GSIB LBOs have experienced “noteworthy increases in size” in the past few years through organic growth and merger activity; similarly, the agencies suggest LBOs are growing more complex due to increased reliance on uninsured deposits, heightened cross-jurisdictional activities, and significant nonbank operations. They suggest, in combination, these features can complicate and potentially narrow options for resolution in the event of material failure or distress. The ANPR seeks input on whether certain resolution-related standards imposed on GSIBs—including “loss-absorbing resources”—might be adapted for use with LBOs and/or their IDIs, potentially increasing the options available for resolution, especially in cases where the LBOs have average total assets of $250 billion or more.
The resolution requirements being considered for LBOs and their IDIs, and questions/issues highlighted by the agencies, follow.
Long term-debt at the holding company-level and/or the IDI level. Questions consider:
Eligibility criteria for long-term debt (in alignment with the GSIB TLAC (total loss absorbing capital) requirements), including requirements that i) the debt be issued at the top-tier holding company level, and ii) the top-tier holding company be a “clean holding company” (including prohibitions on the issuance of short-term debt to external investors or entry into derivatives and other types of financial contracts and arrangements). Questions consider:
Comments will be accepted for a period of sixty days following publication in the Federal Register.
Tiering Framework. The agencies’ joint final rule on resolution plans (published 2019) relies on a risk-based tiering framework that applies the most stringent requirements to the largest, most complex firms. It is based on the FRB’s tiering framework for enhanced prudential standards (also published 2019).