A regulatory capital deduction and an investment ban are different mechanisms. The Federal Reserve's November 2015 proposal would have required specified Board-regulated institutions to deduct investments in covered bank holding companies' unsecured debt from regulatory capital. The final rule published January 24, 2017 did not include that proposed requirement. That omission changes the adopted package without establishing an unrestricted market. [2017-00431][2015-29740]

The proposed treatment concerned state member banks, bank holding companies and savings and loan holding companies subject to the Board's capital rules. In the final preamble, the Board instead described an intention to work with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation toward a proposed interagency approach. It did not announce that such a later approach had been adopted. [2017-00431][2015-29740]

On the issuer side, the final still requires covered domestic systemic holding companies to maintain loss-absorbing resources. Their external TLAC minimum is the greater of 18 percent of risk-weighted assets and 7.5 percent of total leverage exposure, alongside separate buffers. Reading the omitted deduction as removal of the whole capital framework would therefore confuse investor treatment with issuer requirements. [2017-00431][2015-29740]

For market analysis, the useful comparison is between those two sides of the transaction. The documents identify which proposed deduction was omitted and which funding requirements remained; they do not measure the resulting price of bank debt or credit availability. They are successive stages of one agency proceeding, not independent evidence that a particular investment became cheaper, safer or more attractive. [2017-00431][2015-29740]

Source documents

  1. Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important U.S. Bank Holding Companies and Intermediate Holding Companies of Systemically Important Foreign Banking Organizationshttps://www.govinfo.gov/content/pkg/FR-2017-01-24/html/2017-00431.htm
  2. Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important U.S. Bank Holding Companies and Intermediate Holding Companies of Systemically Important Foreign Banking Organizations; Regulatory Capital Deduction for Investments in Certain Unsecured Debt of Systemically Important U.S. Bank Holding Companieshttps://www.govinfo.gov/content/pkg/FR-2015-11-30/html/2015-29740.htm