U.S. to Take Tougher Stance on New Debt Rule, Tarullo Says

Register now

WASHINGTON — A U.S. rule forcing large banks to hold a required level of debt to facilitate a possible resolution by the government will likely be tougher than an international framework on loss absorbency, Federal Reserve Board Gov. Daniel Tarullo said Thursday.

The Financial Stability Board is expected soon to unveil a plan for globally active banks to hold a minimum amount of unsecured debt that could be converted into equity in the wind-down and recapitalization of a failed company. The new framework would institute a so-called "total loss absorbency capacity" requirement.

But Tarullo said the U.S. version of the rule will likely be stronger than the FSB plan, at least in terms of the types of debt banks can use to fulfill the requirement. He also reiterated that new capital surcharges for globally U.S. banks could ultimately be higher than the range set by the international Basel Committee.

"What we will do on TLAC will probably be a little bit more rigorous with respect to some of the qualifying instruments," Tarullo said in remarks to a Washington event sponsored by the Bretton Woods Committee.

Loss absorbency rules are seen as a key ingredient to making the resolution of a systemically important firm a reality. U.S. regulators have discussed imposing minimum requirements for long-term debt as the Federal Deposit Insurance Corp. has developed a new resolution facility for giant firms mandated by the Dodd-Frank Act.

The FDIC has focused on a strategy known as "single point of entry", in which a failed parent is extinguished, its subsidiaries are moved to a temporary bridge and a new firm results. The successor company is recapitalized by converting the claims of the former creditors into equity. Prior to the failure, however, companies must hold enough capital and convertible debt that would be sufficient to launch the new enterprise.

Tarullo said the job of establishing resolution regimes around the world "is still a work in progress."

"There is a considerable amount of work to do, I think, before we can look at one another and say credibly that this task can be accomplished without itself fomenting" problems in the system, he said.

A tougher TLAC standard for U.S. institutions would be just another example of regulators here taking a harder line than standards set by the FSB as well as the international Basel Committee. The U.S. has already gone beyond Basel in establishing a supplemental leverage ratio for the largest banks and a rule for holding liquid assets that could be sold in a liquidity crunch.

Meanwhile, Tarullo's comments Thursday that the Fed will impose "higher [capital] … surcharges than the international agreement has called for" reinforced a stance he expressed at a recent congressional hearing. Last month, he told the Senate Banking Committee that the U.S. surcharge proposal for "globally systemically important banks" will be stronger than the Basel framework in two primary ways.

"First, the surcharge levels for U.S. GSIBs will be higher than the levels required by the [Basel Committee], noticeably so for some firms," he said in testimony prepared for the hearing. "Second, the surcharge formula will directly take into account each U.S. GSIB's reliance on short-term wholesale funding."

At the event on Thursday, Tarullo said capital rules and loss absorbency requirements are examples where there is room for individual nations to go further than the international measures.

There are certain areas such as "capital structure and … the exact composition of instruments that are available for converting to equity in a resolution context, where one doesn't need to internationally have precision and total convergence around a particular approach or a particular level," he said.

He noted the U.S. is not the only country to take a harder line than the international policies. For example, he said, Sweden and Switzerland have already taken steps to strengthen the capital positions of their banks beyond what the international agreements mandate.

"We're trying to take the notion of Basel Committee agreements as a minimum level," he said.

But even though nations are going a step or two above the international measures, Tarullo said much of the work of U.S. regulators is applying global mandates domestically.

"In general, what we will be doing is parallel each of these major elements of the international framework with our own domestic implementation."

He noted specific examples, such as resolution planning, where international cooperation is paramount.

"Things like resolution planning become a lot easier to deal with because we have more confidence that our counterparts in London or … Zurich or wherever, do understand what it is that we're all trying to achieve together," Tarullo said.

For reprint and licensing requests for this article, click here.
Law and regulation Dodd-Frank