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New Proposed Rule to Limit Impact of Large Bank Failures

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U.S. banking regulators have proposed a new regulation to discourage large banks from investing substantially in debt issued by other large peers. This is likely to lower the impact of large bank failures on the financial system.

At present, globally systemically important bank holding companies (GSIBs) including JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) , Goldman Sachs (GS - Free Report) and Wells Fargo (WFC - Free Report) are required to issue debt with certain features under the “total loss-absorbing capacity” (TLAC) rule (finalized in December 2016). This capital will be utilized to recapitalize banks during bankruptcy or failure and lower taxpayers’ losses to bail them out.

Now, if these GSIBs end up buying each other’s TLAC debt, the main purpose of the TLAC rule might get defeated. Therefore, in order to discourage large banks from investing in TLAC debt, the new rule has been proposed.

Per the rule, banks purchasing TLAC debt will be required to hold additional capital against investments in such debt.

Thus, the new proposal from the Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency is aimed to complement the other measures that have been taken over time to “limit interconnectedness” between large global banks.

The proposal also requires the GSIBs to publicly report their outstanding TLAC debt. These proposed regulations will be open for public comments for 60 days after they are formally published.

All the above-mentioned banks currently carry a Zacks Rank #3 (Hold).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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