Proposed Long-Term Debt Requirement Is Far Costlier than Agencies Say

Significant recalibration and simplification are necessary to address deficiencies

Washington, D.C. — The federal banking agencies’ proposal for regional banks to issue long-term debt would result in significant costs to the banks and the economy as a whole, the Bank Policy Institute said in a comment letter submitted today. The cost of the requirement significantly surpasses the agencies’ estimate, and they should therefore reconsider the structure of the proposed requirements to control these heightened costs.

“The proposed long-term debt requirement is a symptom of a growing mismatch in the U.S. bank regulatory framework between the risk profiles of regional banks and their expanding regulatory requirements. This sector of the banking system provides crucial financing to American businesses and consumers and has a distinct business model from a globally active institution. The long-term debt proposal would impose sizable costs on these banks and the customers they serve without commensurate benefits. It’s also a repudiation of the bipartisan tailoring framework enshrined in law. The agencies should revise this proposal to align with the risk profiles of the banks to which it applies and to remedy underestimates in the cost of the requirements.” – Greg Baer, BPI President and CEO

Outsize costs: The costs of the LTD proposal are significantly underestimated. BPI estimates that the costs of the proposed LTD requirements are projected to increase pre-tax annual funding costs by nearly $5 billion. This estimate is approximately 3x higher than the estimates provided in the proposal.

  • BPI recommends that the agencies recalibrate the requirement, differentiate the proposed requirements based on the statutory tailoring framework, and eliminate or significantly revise the prescriptive internal LTD requirement. These recommended changes would help to correct for the higher cost estimates.
  • The minimum denomination requirement for LTD is unsupported, would harm market depth and liquidity, and would be inconsistent with the disclosure-based framework of the federal securities laws and longstanding aspects of the bank capital framework.

The big picture: The banks subject to the proposed long-term debt requirement also face proposed capital increases and other complex regulatory changes under the Basel capital proposal. It is impossible to evaluate the true costs and benefits of this proposal until after any changes to capital requirements are known. The agencies should not finalize any new long-term debt requirement until after a Basel III Endgame rule is implemented.

Why it matters: Regional banks serve as a financing engine for small and mid-size businesses in the U.S. and played a crucial role in the country’s economic recovery from the COVID pandemic. Significant cost pressures on their business models would hurt the broader economy, particularly Main Street companies.


About Bank Policy Institute

The Bank Policy Institute (BPI) is a nonpartisan public policy, research and advocacy group, representing the nation’s leading banks and their customers. Our members include universal banks, regional banks and the major foreign banks doing business in the United States. Collectively, they employ almost 2 million Americans, make nearly half of the nation’s small business loans, and are an engine for financial innovation and economic growth.

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Tara Payne
Bank Policy Institute

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