BPI Submits Supplemental Comments on Joint Agency Long-Term Debt Proposal

Ladies and Gentlemen:

The Bank Policy Institute[1] submits this letter to supplement our January 16, 2024, comments on the joint proposal that would extend long-term debt requirements to regional banks.[2]

We appreciate the Agencies’ consideration of our prior comment letter, as well as the opportunity to meet with the Agencies on February 14, 2024, to discuss the proposal. As a threshold matter, we continue to recommend that the Agencies finalize any new LTD requirement only after any Basel III Endgame rule has been implemented. Because any Basel III Endgame rule would directly affect LTD requirements, it is impossible to know the true costs of the proposal until the Basel III Endgame rule is implemented.[3] We continue to urge the Agencies to thoroughly consider the effects of any capital changes on the calibration of an additional loss-absorbing capacity requirement for covered institutions, together with the other costs we identified in our prior comment letter and in Section V of this letter.[4] Failing to do so may lead to the LTD final rule being arbitrary and capricious under the Administrative Procedure Act’s requirements, as interpreted by the Supreme Court.[5]

As described in our January comment letter and elaborated upon below, we continue to believe the proposed LTD requirements would be much costlier than the Agencies estimate. The Agencies should therefore significantly revise the proposal’s calibration and design to avoid unnecessary and outsized costs for regional banks and other Covered Entities. Our January comment letter described our recommended revisions in detail. This supplemental comment letter provides more detail on certain of these issues and summarizes additional research BPI has conducted regarding the expected costs of the proposal.

Section I describes the disconnect between the proposed calibration based on a “full capital refill” framework and other aspects of the proposal, as well as the August 2023 resolution planning proposals. This disconnect would result in requiring Covered Entities to raise materially more LTD than required by the resolution strategies that the Agencies have otherwise indicated appropriate for Covered Entities. Section II reiterates that the intention of Congress, as implemented by legislation binding on the Federal Reserve, is for the Federal Reserve to tailor any LTD requirements at the holding company level. Although we continue to believe the internal LTD requirement should be eliminated and banking organizations should not be required to issue LTD at both the bank and holding company levels, Section III provides additional detail on how the Agencies could implement a more flexible gone-concern loss-absorbing capacity (“GLAC”) requirement at a lower cost that would still meet the aims of the proposal. Section IV addresses the Agencies’ proposed $400,000 minimum denomination requirement, which would have an adverse impact on the market for LTD and is not necessary to limit retail investment in LTD. Specifically, it describes how existing laws and regulations, the supervisory process, and existing market structures provide retail investor protections. Section V describes additional BPI research showing the proposal would be even costlier than estimated in our prior comments due to the larger buffers covered institutions may need to ensure compliance with the requirements, including during times of market stress when it may be more challenging or expensive to issue LTD.

To read the full comment letter, please click here, or click on the download button below.

[1] The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks, and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud, and other information security issues.

[2] See OCC, Federal Reserve, FDIC, LTD Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions, 88 Fed. Reg. 64,524 (Sept. 19, 2023). The proposal would require certain large depository institution holding companies (“Covered Holding Companies”), certain U.S. intermediate holding companies of foreign banking organizations (“Covered IHCs”), and certain insured depository institutions that are not subsidiaries of global systemically important banks (“GSIBs”) (“Covered IDIs” and, together with Covered Holding Companies and Covered IHCs, “Covered Entities”) to issue and maintain outstanding a minimum amount of LTD (“LTD”).

[3] The proposal stated that the “Basel III reforms proposal would, if adopted, increase risk-weighted assets across covered entities” and these changes “would lead mechanically to increased requirements for LTD under the LTD proposal.” At the same time, the agencies state that “increased capital that would be required under the Basel III proposal could also reduce the cost of various forms of debt for impacted firms due to the increased resilience that accompanies additional capital.” However, “the size of the estimated LTD needs and costs presented in this section do not account for either of these potential effects of the Basel III proposal.”

[4] At a March 6, 2024, House Financial Services Committee hearing, Chairman Powell seemed to agree, responding to questions about the timing implications of a possible Basel III Endgame re-proposal for the long-term debt proposal by saying, “…that’s a question we’d be asking ourselves … what would be the implication for other rules including for the long-term debt [proposal].”

[5] The Administrative Procedure Act authorizes courts to set aside agency action that is arbitrary and capricious. 5 U.S.C. § 706(2). The Supreme Court has held that agencies are required under the APA to “examine the relevant data and articulate a satisfactory explanation for its action” and determined that a rule promulgated after the agency “entirely failed to consider an important aspect of the problem” is generally arbitrary and capricious. Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). The Supreme Court has also held that a statutory requirement that an agency determine whether “regulation is appropriate and necessary” is not “an invitation to ignore cost.” Michigan v. EPA, 576 U.S. 743, 753 (2015).