Federal Reserve orders largest banks to increase reserves by 2019

Washington, Rabi’I 17, 1438, December 16, 2016, SPA — The Federal Reserve issued a rule Thursday for the
largest US and foreign banks to hold enough reserves to be liquidated
in the event of a failure “in an orderly way … without any support from taxpayer-provided capital.”
The Fed’s rule, which applies to eight domestic banks and eight US branches of foreign banks, makes some revisions to a proposal issued in 2015, including setting a January 2019 deadline to meet the requirement, earlier than the 2022 implementation first envisioned, according to dpa.
The final rule sets a minimum level of long-term debt and “total loss-absorbing capacity” for both domestic banks deemed globally systemically important and the US operations of foreign banks likewise deemed globally systemically important, the Fed said.
The resources would be available to recapitalize the firms’ key operations after a bank failure.
The required long-term debts to be held by the banks constitute financial cushions, and could be converted into equity in a reorganized firm.
“While equity is far and away the best form of capital to ensure the resilience of a firm, the whole point of resolution planning is to prepare for the eventuality, no matter how unlikely, that the firm might become insolvent in some circumstances,” Fed Governor Daniel Tarullo said.
“By definition, at that point equity capital will either be totally lost, or at least below the level markets have historically required for a financial intermediary to be credible. “The long-term debt required by this proposal would survive the disappearance of a bank’s equity and resultant failure, and would be available for conversion into new equity.”
–SPA
01:52 LOCAL TIME 22:52 GMT