Federal Reserve Alert! Federal Reserve Board invites public comment on an advance notice of proposed rulemaking to enhance regulators’ ability to resolve large banks in an orderly way should they fail.
Recent merger activity and organic growth have increased the size of large banking organizations. If they were to fail, their large size could complicate efforts by regulators to resolve the firms without disruption to customers and counterparties.
As a result, the advance notice of proposed rulemaking asks for comment on several potential new requirements and resources that could be used for an orderly resolution of these large banking organizations, including a long-term debt requirement.
"As the banking system changes, policymakers must continuously evaluate whether resolution-related standards and prudential standards for large banks keep pace," Vice Chair for Supervision Michael S. Barr said. "That is why we welcome comment on an advance notice of proposed rulemaking on resolution-related standards, and are evaluating whether capital requirements for large banks, including global systemically important banks—as well as other elements of the prudential framework—should be updated."
The advance notice of proposed rulemaking was jointly developed with the Federal Deposit Insurance Corporation (FDIC). Comments will be accepted for 60 days after publication in the Federal Register.
Also on Friday, the Board announced its approval of the application by U.S. Bancorp, of Minneapolis, Minnesota, to acquire MUFG Union Bank, National Association, of San Francisco, California. In connection with the Board's approval, U.S. Bancorp has committed to provide the Board and the FDIC with an interim update to its resolution plan reflecting the combined organization, and implementation plans related to heightened prudential standards.
As I have noted previously, the increases in banking concentration in the $250-700 billion asset size category raise concerns. Since we know from experience that even noncomplex banks in that range can pose risks to the broader financial system when they experience financial distress, I am encouraged that the Board is seeking comment on an advance proposal to improve their resolvability through long-term debt requirements and is undertaking a serious review of large bank capital requirements.
Today, the Board acted on two matters: (1) the publication of an advance notice of proposed rulemaking (ANPR) soliciting public feedback on changes to the large bank resolution plan framework, and (2) approval of an application filed by U.S. Bancorp. While I generally support both actions on their individual merits, I believe these matters should not be expressly linked, and there are elements of these actions that raise additional concerns.
Advance Notice of Proposed RulemakingWhile the resolvability of large banking organizations should not be considered in connection with an individual application, it is an important issue that could benefit from public discussion and feedback. It is possible that changes to the existing regulatory and supervisory framework could enhance the resolvability of large banking organizations. In considering any changes, however, it is important to consider possible costs and unintended consequences. For example, the ANPR solicits feedback on whether large banking organizations should be required to issue more long-term debt, which could be "bailed in" to improve resolvability. Increased reliance on long-term debt funding could adversely impact the cost and availability of credit.
I look forward to reviewing public comments on the approaches discussed in the ANPR, including on the costs and benefits of these approaches. While I voted in favor of seeking public comment on the ANPR, this vote does not indicate my support for future rulemaking proposals. I will evaluate future proposals on their merits.
U.S. Bancorp ApplicationI support the Board's action to approve the U.S. Bancorp application, but I am concerned about several aspects of the approval. I am concerned that the commitment that could impose heightened prudential standards at a fixed date in the future is inconsistent with the Board's existing regulatory framework, which imposes tailored requirements based on clear, quantitative measures of the firm's underlying risk.
The Board has tailored the application of its large banking organization regulatory requirements to match their respective risk profiles based on objective, quantitative thresholds of asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. As described in the order, both before and after consummation of the proposed transaction, U.S. Bancorp would be classified as "Category III" under the Board's regulations. This imposes specific requirements and expectations that are established by rule. Of course, the firm may grow beyond its Category III designation and therefore be subject to these heightened standards.
Notwithstanding the clear category thresholds established through notice and comment rulemaking, the Board's order suggests that it may require the firm to comply with Category II standards by the end of 2024, regardless of whether the firm would be subject to these requirements by regulation. This determination does not appear to be driven by any specific concern about financial stability. If the Board believes that the firm should be subject to heightened prudential standards in the future to address financial stability concerns, the Board's rules and regulations provide a means to do so1.
While I support issuing an advance notice of proposed rulemaking to solicit public comment on the appropriateness of certain resolution-related requirements for large banks, that does not mean I support or oppose applying such requirements to those banks. I look forward to reviewing the comments received.