By Pete Schroeder
WASHINGTON (Reuters) - U.S. bank regulators proposed a rule on Tuesday that would discourage large banks from heavily investing in debt issued by other large banks by requiring them to hold additional capital against such investments.
The proposal from the Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency is aimed at ensuring banks do not end up holding large amounts of "total loss-absorbing capacity" (TLAC) debt from fellow banks.
Banks are required to issue TLAC debt under new rules established after the 2008 financial crisis, which were aimed at ensuring banks can quickly access more equity if pushed to bankruptcy.
Banks are required to issue TLAC debt under new rules established after the 2008 financial crisis, which were aimed at ensuring banks can quickly access more equity if pushed to bankruptcy, lowering the odds taxpayers would need to bail them out.
However, if large banks like JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), and Citigroup (NYSE:C) simply bought up each other's debt, regulators worry it could weaken that safeguard should a broad future crisis hit multiple global banks at once.
Specifically, the rule would actively discourage larger banks from investing in TLAC debt by requiring banks put up additional capital against large amounts of such investments. The proposal would also require those banks to publicly report how much of that debt they have outstanding.
Regulators finalized rules requiring the additional debt at the end of 2016. The proposed changes are open for public comment for 60 days after they are formally published.