On January 20, 2016, FDIC Vice Chairman Thomas M. Hoenig gave a speech to the Peterson Institute for International Economics, during which he challenged the Federal Reserve Board’s proposal on TLAC. While agreeing that converting debt is often part of a reorganization or recovery strategy, Hoenig discussed the risks of increased debt levels on the stability of the banking system. The proposed TLAC rule requires GSIBs to maintain sufficient long-term debt to facilitate a Single Point of Entry resolution approach, wherein only the top-tier holding company would be put into receivership and through conversion of debt to equity the operating subsidiaries would be recapitalized. Hoenig noted that the proposed rule estimates that to meet a collective $680 billion long-term debt requirement, GSIBs will need to issue approximately $100 billion in new debt. Hoenig also discussed the negative consequences of the proposal, notably the leverage that it would add to an already highly-leveraged industry, as well as the fact that it may encourage firms to adopt an SPOE resolution strategy and otherwise change their business models even where their Title I resolution plans do not currently contemplate an SPOE plan. The Vice Chairman suggested that “(t)he long-term debt requirement would place added earning demands on the banking system and could be counter-productive, especially during a period of financial stress”. Hoenig also suggested that rather than imposing a rule that facilitates only the SPOE strategy, regulators may want to adopt an approach that is tailored to the business model and resolution plan of each individual institution, even where the approach might call for varying debt and equity requirements.
The Vice Chairman’s speech is available at: https://fdic.gov/news/news/speeches/spjan2016.html.