America's largest banks face an unsettling wait for the Federal Reserve to clarify an unexpected quirk in its interpretation of new global capital requirements, which would potentially disqualify billions of dollars of senior unsecured debt. Because US banks tend to issue through their holding companies, expectations had been that their senior bonds would meet the new Financial Stability Board's subordination rules and qualify as loss-absorbing. However, a consultation paper published by the Federal Reserve at the end of October has changed those expectations. The paper addressed provisions in existing senior bonds that allow acceleration of payments for reasons other than insolvency or payment default. The paper proposed that debt with such terms would not be TLAC-eligible. The Fed wants to restrict payment acceleration for other reasons so it has free rein to impose losses on holders of TLAC-eligible long-term debt when banks fail.
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