The FRB has unanimously approved the final version of its proposed standards requiring U.S. GSIBs and the IHCs of foreign banks determined by the FRB’s methodology to be GSIBs to hold total loss-absorbing capacity (TLAC) largely in the form of eligible long-term debt (LTD). Covered companies that fall short will be subject to new sanctions on capital distributions and discretionary bonuses regardless of the degree to which capital distributions are otherwise permitted. To ensure that LTD meets the FRB’s expectations for loss-absorbing capacity, the final rule also limits liabilities issued by covered top-tier holding companies and required that this parent company be a “clean” BHC that readily assures liquidity sufficient to ensure orderly resolution under both the U.S. Bankruptcy Code and OLA. Although the final rule is modified in significant respects from the NPR, it will still require strategic changes by covered companies, changes intended to ensure that U.S. rules now effectively preclude taxpayer bail-out and thus ensure a reliable end to too-big-to-fail banks. The final rule does not impose a capital penalty for holding TLAC by other GSIBs, but this may be pursued shortly with a new rule from the FRB, OCC, and FDIC.
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