In an effort to protect the overall financial system from the failure of a large bank, U.S. federal banking regulators are proposing a new rule designed to limit the risk of contagion between banks.
The U.S. Federal Reserve Board, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency jointly proposed a rule on Tuesday that aims to limit the interconnectedness of large banks by requiring them to allocate additional capital against their holdings of other banks’ total loss-absorbing capacity (TLAC) debt.
One of the post-crisis reforms to global bank capital rules requires global systemically important banks (GSIBs) to issue TLAC debt, which can be used to recapitalize a failing bank. The measure is designed to guard against future taxpayer bailouts.
To discourage big banks from acquiring large quantities of other banks’ TLAC debt, regulators are proposing a new rule that would require them to allocate more capital against these holdings.
“This would reduce interconnectedness between large banking organizations and, if a GSIB were to fail, reduce the impact on the financial system from that failure,” they said in a statement.
The proposal is out for a 60-day comment period.