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January 23, 2023

The Fed and FDIC Have to Stop Pretending that Capital Substitutes Like TLAC Will Work in Large Bank Resolution When They Are Fundamentally Flawed

WASHINGTON, D.C.— Dennis M. Kelleher, President and CEO of Better Markets, released the following statement on the filing of Better Markets’ Comment Letter to the Federal Reserve and Federal Deposit Insurance Corporation on their advance notice of proposed rulemaking regarding the resolution-related resource requirements for Large Banking Organizations:

“Effective resolution planning that includes ample readily available capital is critically important to prevent future bank failures, contagion and financial crashes.  This is especially true for so-called global systemically important banks (‘GSIBs’) and those very large banks just a bit smaller, so-called domestically systemically important banks (‘DSIBs’), which are the focus of a proposed rule from the Federal Reserve and Federal Deposit Insurance Corporation.  Unfortunately, the proposal is fundamentally flawed and will not work because the agencies are, once again, relying on the fallacy that convertible long-term debt (TLAC) will limit contagion and allow for a smooth resolution process.  That will not happen.

“As proven over and over, such debt likely increases the financial burden and risk profile of large banks and – as seen in several examples in Europe – only shifts the losses from the banks to pensioners and other debt holders that the government will almost certainly bail out anyway. Put another way, the government would still have to bail out the same losses as if the convertible long-term debt weren’t there in the first place.  To pretend otherwise is a fraud on the public who will be fooled into thinking that there are valid layers of protection at the banks when that is nothing but a mirage.

“This again proves the obvious: there is no substitute for capital, and capital requirements for large banks must be higher. In addition to overall capital requirements, since one of the goals of the long-term debt requirements is to capitalize the subsidiaries in resolution, there must be capital requirements for material subsidiaries. That way the banks’ losses would in fact be absorbed by the banks who would bear the costs of their profit-making activities, rather than once again shifting the burden to the public.  Regulators must end the privatization of profits and the socialization of losses, but this proposal does the opposite and, again, increases moral hazard.

“Beyond long-term debt and capital, there are several enhancements that should also be made to the resolution process to make it more effective in limiting contagion, losses to the deposit insurance fund, and losses to taxpayers. The agencies are right to bring all large banking organizations up to a standard that actually protects the American public from the catastrophic fallout that results from their failure, but they must do it in a way that will be effective. Pretending otherwise may fool some people until the next financial crisis, when there will again be a crisis of confidence in the banking regulators who will also have failed again.”

Read our full comment letter here.


Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit


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