TLAC | Final Standards Are Only The Start Of A Longer Journey

Global systemically important banks (G-SIBs) will be required to meet a new prudential requirement - Total Loss-Absorbing Capacity (TLAC) - by 2019, in line with a new global standard published by the Financial Stability Board (FSB).

TLAC is the focal point for resolution authorities in their drive to make the 'bail-in' of creditors a credible means of absorbing losses and recapitalising failing banks, thereby eliminating the need for public funds. TLAC will essentially require G-SIBs to hold a layer of long-term unsecured debt over and above their minimum regulatory capital requirements - debt which will be made unambiguously loss-absorbing through bail-in.

TLAC is simple in concept but fiendishly complicated in the detail. And while the FSB's publication creates an international standard, its implementation into national laws and rules will create challenges, including in terms of global consistency. The document may well set out the 'final' standard, but there is a lot of technical work to do to make the regime a practical reality.

Where did the FSB land?

The FSB's initial TLAC consultation was published in late 2014, and after more than a year of debate and assessment the FSB has set out its stall ahead of the G20 Leaders' Summit in Antalya, Turkey, which takes place this weekend.

The main questions in relation to TLAC have always been:

Eligibility - which liabilities should count? Location - where in the group should those liabilities be issued from and held? Amount - what quantities of these liabilities should banks be required to have? The FSB has provided answers to all three questions, but in a way that has left issues open. National resolution authorities will need to determine the answers on a bank-by-bank basis over the next few years.

Eligibility: a bank's TLAC will be made up of its regulatory capital, including CET1, Tier 1 and Tier 2 instruments, as well as various non-capital instruments which are deemed 'eligible' for inclusion in the buffer (in virtue of their being perceived to be readily bail-in-able). But determining which specific instruments this should include has not been straightforward. Among those excluded are structured notes, on account of their having derivative-linked features, which some resolution authorities argue complicate their bail-in.

There was brief discussion earlier this summer about whether structured notes might be made conditionally eligible for TLAC, but the FSB has come out against this in...