The Federal Reserve Board and the Federal Deposit Insurance Corp. are expected to release a proposal that would require the biggest U.S. financial institutions to hold long-term debt that could be converted to equity should a bank fail.
"If an extreme tail event occurs and the equity of the firm is wiped out, successful resolution without taxpayer assistance would be most effectively accomplished if a firm had sufficient long-term, unsecured debt to absorb additional losses and to recapitalize the business transferred to the bridge operating company," said Fed. Governor Daniel Tarullo in prepared remarks at a conference hosted by the St. Louis Fed.
Tarullo, who is in charge of bank supervision and regulation at the central bank, said such debt should "help other creditors clarify their positions in the orderly liquidation process."
Other Fed officials agreed.
"We don't yet have a long term debt requirement - this is an area where we are still working out the details," said New York Fed President William Dudley.
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