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Federal Reserve TLAC policy proposals

Thus, depending on whether redundant systems are set up, the national holding company needs to raise TLAC in the amount of either |$F-(1+\gamma)(C_{1}^{L}+\lambda \overline{p}{2}V)$| or |$\widetilde{F}-(1+\gamma)(C{1}^{L}+\overline{p}{2}V)$|⁠. As discussed in detail in Appendix A, it is always in the interest of each national holding company to issue some TLAC in the form of subordinated long-term debt. More precisely, it is privately optimal for each holding company to issue long-term debt with a face value that weakly exceeds the maximum amount of cash that the bank may carry forward from date |$1$| to date |$2$|⁠. Doing so ensures that all fairly priced (date 1) cash flows are sold to investors, thereby minimizing the amount of financing that has to be raised against |$V$|⁠, which is subject to a lemons problem. The maximum amount of cash the bank has left after repaying short-term debt at date 1 is given by |$C{1}^{H}+\Delta -R_{1}$|⁠. Therefore, under MPOE, the bank will set the face value of long-term subordinated debt to |$R_{LT}^{\text{MPOE}}\geq C_{1}^{H}+\Delta -R_{1}\equiv \hat{R}_{LT}^{\text{MPOE}}$|