Fed exploring whether it has appropriate resolution tools for large bank failures

The Federal Reserve today announced it is seeking public comment on possibly drafting new requirements for large banks to alleviate the economic effects should the banks fail. The Fed approved an advance notice of proposed rulemaking asking for comment on possible new requirements, including a long-term debt requirement. The proposed rulemaking would apply to large banking organizations in Categories II and III, which generally exceed a threshold of $250 billion in total consolidated assets, according to the notice, which was drafted jointly with the FDIC.

In an accompanying memo, the Fed said that large banks “have experienced noteworthy increases in size” that “may narrow resolution options in the event of their material failure or distress.” The agency is seeking comment on whether certain resolvability-related requirements, such as a long-term debt requirement, would address financial stability risks posed by a large bank’s failure. It also seeks comment on the costs associated with such a proposal, recognizing that a long-term debt requirement “could impact the cost and availability of credit,” and on whether additional resolution-related standards, such as guidance on separability, would be useful for enhancing optionality in the resolvability of large banks. The notice came the same day the Fed approved U.S. Bancorp’s acquisition of MUFG Union Bank.

Fed Governor Michelle Bowman released an accompanying statement in which she expressed support for exploring the issue but cautioned that regulatory change could bring about unintended consequences, pointing specifically to the potential effects on the cost and availability of credit. “I will evaluate future proposals on their merits,” she said.