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Federal Banking Agencies Address “Too Big to Fail”

On Tuesday, the federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency proposed a rule to "limit the interconnectedness of large banking organizations and reduce the impact from failure of the largest banking organizations."

The FDIC states that the proposal would complement other measures that the banking agencies have taken to limit interconnectedness among large banking organizations.

According to the FDIC, global systemically important bank holding companies (GSIB), are the largest and most complex banking organizations and are required to issue debt with certain features under the Board's "total loss-absorbing capacity," (TLAC) rule. That debt would be used to recapitalize the holding company during bankruptcy or resolution if it were to fail.

To discourage GSIBs and "advanced approaches" banking organizations from purchasing large amounts of TLAC debt, the proposal would require such banking organizations to hold additional capital against substantial holdings of TLAC debt. This would reduce interconnectedness between large banking organizations and, if a GSIB were to fail, reduce the impact on the financial system from that failure.

While the federal banking agencies’ plan is to protect from the economic impact of failing banks, how are homeowners being protected? A week earlier, The Senate Banking, Housing, and Urban Affairs Committee met to discuss the committee’s Chairman Sen. Mike Crapo’s housing finance reform outline.

During his opening statement, Crapo said that his outline set out a “blueprint for a permanent, sustainable new housing finance system.”

Under the outline, he said that the new housing finance reforms would protect taxpayers by reducing the systemic, too-big-to-fail risk posed by the current duopoly of mortgage guarantors; preserve existing infrastructure in the housing finance system that works well, while significantly increasing the role of private risk-bearing capital; establish several new layers of protection between mortgage credit risk and taxpayers; ensure a level playing field for originators of all sizes and types, while also locking in uniform, responsible underwriting standards; and promote broad accessibility to mortgage credit, including in under-served markets.

Learn more about the proposal from the FDIC here.

About Author: Seth Welborn

Seth Welborn is a Reporter for DS News and MReport. A graduate of Harding University, he has covered numerous topics across the real estate and default servicing industries. Additionally, he has written B2B marketing copy for Dallas-based companies such as AT&T. An East Texas Native, he also works part-time as a photographer.
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