Late last week, the Federal Reserve approved a proposed rule to prevent taxpayer-funded bank bailouts. The Fed estimates that under its proposed new rule, six of the nation’s biggest banks would have to take out a total of $120 billion in long-term debt.
The debt would be a cushion. If a bank failed, those long-term investors could be left holding the bag.
“The proposal is another important step in addressing the too-big-to-fail problem,” said Fed Chair Janet Yellen.
The Fed estimates banks will spend up to $1.5 billion a year on the extra debt. Some shareholders of big financial companies are already complaining.
David Wright, managing director of Deloitte and Touche’s bank regulatory practice, maintains that some firms are being pressured to avoid the new rules by downsizing, so they’re not categorized as too big to fail.
“There are many firms out there that are reconsidering what businesses they should be in,” he said. “They might remove themselves from certain lines of business that they think don’t make sense.”
The Fed will take comments on the rule before finalizing it. Banks have until February 1 to tell the Fed how they feel.
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