FRB System Risk Rule (Nov. 2)

Mike & Co. —

The top-lines on FY 2016 domestic and military spending settled, there remains work on how that funding should be divvied up among agencies and federal programs.  In the coming weeks, the Appropriations Committees will begin crafting an omnibus spending bill that must be signed into law by Dec. 11 to keep the government open.

Meanwhile, this week features a number of relevant votes and hearings on the Hill as well as agency activity, previewed below.  Also, drill-down on a far-reaching systemic risk rule proposed by the Fed for comment today.

Best,

Dana

—————–

Events of Note — Week of Nov 2-6

  •   FRB “loss-absorbency” rule: 

This morning, the Fed released an ambitious systemic risk rule “to improve resolvability and resiliency” for comment.  More below.

  •   FSOC: 

 

This afternoon, the FSOC held a meeting focused mainly on asset management and cybersecurity.  http://www.treasury.gov/initiatives/fsoc/council-meetings/Pages/default.aspx

  •  Highway Bill:

The budget deal done, Congress is turning to the long-term Highway Trust Fund bill.  The House and Senate both passed short-term extensions last week to set up a ping-pong style amendment process that will let members submit for floor consideration non-transportation related amendments to the Senate’s six-year highway bill.

House Rules met today to set parameters for floor debate and tomorrow will decide which amendments get up-or-down votes from among over 250 filed.

  •   House Wall Street reform bills:

Mark-ups start tomorrow morning at 10 am of up to ten wide-ranging bills at House Financial Services:  http://financial-services.house.gov/calendar/eventsingle.aspx?EventID=399847

  • .Janet Yellen testifies: 

HFSC’s semi-annual hearing on issues in banking regulation, Wednesday at 10 am.  Staff memo: http://financialservices.house.gov/uploadedfiles/110415_fc_hrg_memo.pdf

  • .  Biennial budgeting:

Wednesday 10:30 am, Senate Budget holds a hearing on biennial budgetinghttp://www.budget.senate.gov/republican/public/index.cfm/press-releases?ID=95089433-266f-4204-a0ba-bcc30e45718d

  •   October jobs report:

8:30 am Friday, BLS releases the latest unemployment figures and October jobs report.

  •   FRB “loss-absorbency” rule — a closer look:

This afternoon the Fed’s board of governors will released a proposal that would task investors with funding a minimum financial buffer inside the parent company of large-scale banks.  The “total loss absorbency” requirements, including rules mandating that banks must hold a sufficient amount of long-term debt, are aimed at making sure officials responsible for reviving ailing banks have a cushion to work with other than taxpayer dollars.

Janet Yellen:   “The proposal, combined with our other work to improve the resolvability of systemic banking firms, would substantially reduce the risk to taxpayers and the threat to financial stability stemming from the failure of these firms.”

At the heart of the Fed’s proposal are requirements that banks issue through their holding companies a minimum amount of “plain vanilla,” long-term debt with maturities of at least one year.  The banks would be required to hold long-term debt equal to the greater of 6 percent of risk-weighted assets plus the firm’s systemic capital surcharge as well as 4.5 percent of total leverage exposure.

The rules would apply to large banks including JPMorgan Chase, Wells Fargo and Goldman Sachs.  A different set of requirements would apply to the U.S. “intermediate holding companies” of foreign banks.

The Fed is also proposing “clean holding company” requirements that would restrict bank holding companies and certain U.S.-based arms of foreign banks from being the home to short-term debt issued to third parties and derivatives with external counterparties.

Because the Fed rule would require banks to issue a minimum amount of debt, analysts expect banks that are more reliant on funding from customer deposits will have more work to do to comply than Goldman Sachs and Morgan Stanley, which are not.  Some banks have been issuing debt ahead of the release of the rules.  The Fed expects that U.S.-based banks covered by the rule have a long-term debt shortfall of $90 billion.The rule would discourage banks from buying each others’ debt, but wouldn’t penalize purchases by non-banks designated as “systemically important,” such as Prudential Financial and American International Group.

The Fed is still developing regulations for those large non-banks.  The Fed plans to take public comment on the proposals until February 1, 2016.

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