On December 15th 2016, the Federal Reserve (Fed) finalized its long-discussed Total Loss-Absorbing Capacity (TLAC) requirements. As mentioned in our discussion of Donald Trump’s electoral victory, we expect this to be one of the final significant financial rulemakings for the foreseeable future. The Fed’s TLAC requirements apply to the eight US global systemically important banks and US intermediate holding companies (IHCs) of foreign GSIBs, requiring them to have enough capital and debt in order to reduce the likelihood of failure and to minimize the risk for government (and taxpayer) support. The Fed’s final rule came out mostly in line with its proposal from last October, however, the Fed delivered several concessions to the industry, most notably by (a) grandfathering previously issued debt that can be used to meet the requirements and (b) lowering debt requirements for the IHCs.
1. Previously ineligible debt will now be grandfathered.
2. US banks have a new TLAC buffer.
3. No internal debt requirement for US banks.
4. US intermediate holding companies debt requirements are now more similar to those for US banks.
5. Certain US intermediate holding companies can now issue debt to third parties.
6. US intermediate holding companies avoided higher taxes on equity.
7. Clarification on permitted contracts still to come.
8. The Fed did not include a final rule on inter-bank debt holdings.
9. A few industry requests were not granted.
10. The road ahead is shorter than before.