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On August 29, 2023, the U.S. federal banking regulators issued a proposal that would establish a long-term debt (LTD) requirement for large U.S. banking organizations with $100 billion or more in total assets. The proposal would apply to the largest regional banks (e.g., PNC, Citizens, M&T, Fifth Third, Key) that are not global systemically important banks. Regulators estimate that those impacted would need to issue approximately $70 billion in new debt to satisfy minimum requirements.
Under the proposal, each firm’s LTD requirement would be based on the greater of 6% of their risk-weighted assets, 3.5% of their assets, and for banks subject to the supplementary leverage ratio, 2.5% of total leverage exposure under the supplementary leverage ratio. Importantly, the LTD requirement would apply at both the holding company and insured depository institution (IDI) levels. LTD at the holding company level would be issued externally, whereas LTD issued by an insured depository institution subsidiary would be issued internally to its holding company. In terms of eligibility for external LTD, the instrument must be paid in and issued directly by the holding company, have a maturity of more than one year from the date of issuance, be unsecured, be “plain vanilla” (for example, structured notes and debt that could be converted into equity instruments would be ineligible), be governed by U.S. law, and have a minimum principal denomination of at least $400,000. In addition, principal due to be paid on eligible external LTD in one year or more but less than two years would be subject to a 50% haircut for purposes of the external LTD requirement. Principal due to be paid on eligible external LTD in less than one year would not count toward the external LTD.
Regulators are proposing a three-year transition period. During that period, banking organizations would need to meet 25% of their LTD requirements by one year after finalization of the rule, 50% after two years, and 100% after three years.
The LTD proposal is the latest in a series of regulatory actions aimed at the regional banking sector following the recent bank failures in spring 2023. Comments on the proposal are due by November 30, 2023. We would be happy to answer any questions.