First take: TLAC

November 2014

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Overview

On November 10th, the Financial Stability Board (FSB) issued a long-awaited consultative document that defined a global standard for minimum amounts of Total Loss Absorbency Capacity (TLAC) to be held by Global Systemically Important Banks (G-SIBs). TLAC is meant to ensure that G-SIBs have the loss absorbing and recapitalization capacity so that, in and immediately following resolution, critical functions can continue without requiring taxpayer support or threatening financial stability.

The FSB’s document requires a G-SIB to hold a minimum amount of regulatory capital (Tier 1 and Tier 2) plus long term unsecured debt that together are at least 16-20% of its risk weighted assets, i.e., at least twice the minimum Basel III total regulatory capital ratio of 8%. In addition, the amount of a firm’s regulatory capital and unsecured long term debt cannot be less than 6% of its leverage exposure, i.e., at least twice the Basel III leverage ratio. In addition to this “Pillar 1” requirement, TLAC would also include a subjective component (called “Pillar 2”) to be assessed for each firm individually, based on qualitative firm-specific risks that take into account the firm’s recovery and resolution plans, systemic footprint, risk profile, and other factors.

  1. TLAC is manageable but will be costly for some G-SIBs.
  2. TLAC’s 33% debt requirement will be expensive.
  3. US implementation is likely to be more severe than other jurisdictions’.
  4. Deposit taking and “traditional banking” get penalized.
  5. Does TLAC favor certain business models over others?
  6. The TLAC solution may solve the wrong problem.
  7. Pre-positioning of TLAC at foreign subsidiaries challenges global banking.
  8. Pillar 2 requirements are too imprecise to be meaningful now.
  9. Banking sector risk will be pushed to other sectors.
  10. A long road ahead before ending the TBTF perception.

This First take elaborates on the key points above and discusses what's next.

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