The Federal Reserve Board, the FDIC, and the OCC ("banking agencies") revised the regulatory capital rule in order to limit the interconnectedness of large banks and reduce systemic risk.

The final rule applies to "advanced approaches banking organizations" and requires deductions from their regulatory capital when they are investing in certain unsecured debt and other instruments issued by foreign or U.S. globally systemically important banking organizations ("GSIBs") in order to meet "total loss-absorbing capacity" ("TLAC") requirements and long-term debt requirements.

Under the final rule, the banking agencies listed, among others, the following investments for which regulatory capital deductions are required:

  • investments in unconsolidated financial institutions' capital instruments that would serve as regulatory capital if such instruments were issued by the banking organization itself; and
  • investments in a banking organization's own regulatory capital instruments, and investments in reciprocal cross holdings with other financial institutions.

The deductions are intended to discourage banking organizations from investing in other financial institutions' capital.

In addition, the final rule amended a number of regulatory reporting requirements to require that GSIBs publicly report their outstanding TLAC debt.

The final rule goes into effect on April 1, 2021.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.