On October 24, 2022, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation issued an advance notice of proposed rulemaking on whether an extra layer of total loss-absorbing capacity (“TLAC”) should be added to help in resolving a large banking organization or its insured depository institution. TLAC is essentially an additional layer of senior or subordinated debt to be issued at the bank holding company level to provide loss absorption capacity in the event of a bank failure. TLAC requirements are currently applied to the eight U.S. Global Systemically Important Banks1 but not to other large banks exceeding $100 billion in assets.

Piper Sandler has filed a comment letter to respond to these concerns.

As we explain in our letter,

• The fundamental issue is whether an increase in asset size poses a systemic risk that the current regulatory framework does not address.
• From our view, the existing framework with Basel III capital and liquidity requirements and the Dodd Frank Act (DFA) prudential risk standards, along with CECL reserve requirements, adequately address the financial stability risk included in the DFA.
• Reducing the likelihood of uninsured depositor losses and systemic risk are essential and laudable goals, but we risk creating a system of implied uninsured depositor protection for only the largest banks which may raise concerns about moral hazard risk.
• We already have an existing framework for Category I, II, III and IV banks with different capital, liquidity, and risk management requirements based on asset size and risk parameters.
• To require additional TLAC outside of this existing framework simply increases cost to those banks with no nexus to additional risk other than asset size.
• Before adding a requirement for additional TLAC, we suggest amending the existing Category I, II, III and IV frameworks to better reflect and calibrate any perceived increase in risk.

We would welcome the opportunity to hear your perspective on these important issues. Please contact your Piper Sandler coverage person if you have any questions or comments.

1) As of September 30, 2022, these banks consisted of JPMorgan Chase & Co., Bank of America, Citigroup, Inc., Wells Fargo & Company, The Goldman Sachs, Group, Inc., Morgan Stanley, The Bank of New York Mellon Corporation, and State Street Corporation.