The Federal Reserve and fellow US bank regulators are moving to prevent banks from building outsized positions in the debt of other banks. The new rules would prevent large banks from hoovering up bank bonds offered as "total loss-absorbing capacity" or TLAC debt. But the rules could seize up markets for bank debt and hurt liquidity at the worst possible time, according to critics of the proposals. Global systemically important banks, or G-SIBs, are required to issue debt with certain features under TLAC rules. Most importantly, TLAC debt must be able to recapitalise the bank in the event of its failure. That feature makes it inappropriate for banks to hold as capital, the regulators say. The rules would limit banks from holding their own debt as well. To discourage G-SIBs and banks with more than US$250bn in assets or US$10bn in on-balance sheet foreign exposure from purchasing large amounts of TLAC debt, the proposal would require such banks to hold additional capital against TLAC debt.
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