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Today, SIFMA and SIFMA AMG submitted a comment letter to the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation, regarding their proposal to extend long-term debt (LTD) requirements to large banking organizations and amend the terms of eligible long-term debt to include a minimum denomination requirement, amongst other changes. SIFMA and SIFMA AMG expressed strong concerns with the proposal and its resulting adverse effects on banking funding costs and liquidity in bank funding markets.
“SIFMA and SIFMA AMG support efforts to ensure there is adequate loss-absorbing capacity in the U.S. banking system. However, the agencies’ LTD proposal threatens to materially impede investor demand for LTD securities, while simultaneously increasing the supply of these instruments to the market.” SIFMA and SIFMA AMG stated in the comment letter. “As a result, the proposal as currently written would have significant adverse effects on bank funding costs and on the liquidity of bank funding markets.”
The letter recommends that the agencies consider and address the following issues before finalizing the proposal:
- LTD Minimum Denomination: The proposed minimum denomination requirement for newly issued eligible debt securities would adversely change current industry LTD issuance practices in ways that will reduce the diversity of the institutional investor base and liquidity in LTD markets. It should not be adopted in the final rule.
- Internal LTD Requirement: The proposed “internal LTD” requirement would over-calibrate the “external LTD” requirement, creating liquidity problems in the bank debt markets and negatively impacting firms’ ability to provide credit and capital market services. It should be recalibrated and its scope of application changed as discussed in the letter.
- Clean Holding Company Requirements: The proposal’s limited exemptions to the prohibition on covered entity holding companies entering qualified financial contract arrangements should be expanded to cover normal course transactions that do not conflict with the agencies’ underlying policy objectives.
- Changes to the Existing TLAC Rule: The proposed changes to the calculation of TLAC are unnecessary and could adversely affect firms’ funding plans. As such, they should not be adopted. However, if they are adopted, they should only apply to newly issued LTD.
- Uninsured Deposits: The agencies should acknowledge and consider the distinctions among different types of uninsured deposits, including differing levels of risks.
SIFMA and SIFMA AMG also note that the proposal in its current form does not account for the impact of Basel III Endgame – and other outstanding proposals – on the amount and costs of LTD. It urges the agencies to refrain from finalizing any new LTD requirements until the agencies can fully consider the impacts between the two proposals. Sequencing the LTD requirement’s transition period to follow the transition period for any final rule implementing the Basel III Endgame proposal would help facilitate the accretion of capital and minimize impacts to borrowers.
“The Basel III Endgame proposal would significantly increase risk-weighted assets for covered entity banking organizations, which would lead mechanically to increased requirements for LTD under the LTD proposal. Yet the agencies acknowledge that their estimates of the LTD needs and costs presented in the proposal do not account for the impact of the Basel III Endgame proposal.”
The comment letter further expands on these views and can be found here.
