U.S. Fed proposes new rule to reduce bailout risks

U.S. Federal Reserve on Friday proposed a new debt requirement rule targeting at the largest American and foreign banks operating in the U.S., in order to reduce bailout risks.

The proposed rule would apply to large banks which are identified as global systemically important banks (GSIBs) and to the U.S. operations of foreign GSIBs, said the Fed.

These institutions would be required to meet a new long-term debt requirement and a new "total loss-absorbing capacity" (TLAC) requirement.

Under the proposed rule, U.S. domestic large banks would be required to set a minimum level of long-term debt that could be used to recapitalize their critical operations upon failure.

The complementary TLAC requirement would set a minimum level of total loss-absorbing capacity, which can be met with both regulatory capital and long-term debt.

Eight largest U.S. banks would be subject to the new rule, namely Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, and Wells Fargo.

According to the Fed's estimate, these eight banks would need to issue a total of 120 billion U.S. dollars of new long-term debt in order to meet the new requirements.

"The long-term debt requirement we are proposing today, combined with our other work to improve the resolvability of systemic banking firms, would substantially reduce the risk to taxpayers and the threat to the financial stability stemming from the failure of these firms," said Fed chairwoman Janet Yellen.

"This is an important step toward ending the market perception that any banking firm is 'too big to fail'," she said.

The proposed rule also required large foreign banks to meet certain long-term debt and TLAC requirements. But the long-term debt and TLAC would be required to be issued from the U.S. operations to the foreign parent, rather than sold to external investors. Enditem