The Financial Stability Board (FSB) issued the final minimum total loss-absorbing capacity (TLAC) standard for 30 banks identified as global systemically important banks (G-Sibs) that the Basel Committee on Banking Supervision (BCBS) deems at risk from being too big to fail on 9 November 2015.
The TLAC requirements aim to bolster G-Sibs’ capital and leverage ratios, ensuring these banks are equipped to continue critical functions without threatening financial market stability or requiring further taxpayer support.
A comprehensive quantitative impact study (QIS) was completed by the FSB in collaboration with the BCBS to calibrate the optimal Pillar 1 element of the TLAC requirement for all G-Sibs. The FSB proposed a minimum total loss-absorbing capacity (TLAC) requirement for G-Sibs in November 2014, in consultation with the BCBS. Basel III rules require banks to meet a minimum total capital ratio of 10.5% by 2019 – though in some jurisdictions the minimum ratio is far higher. The proposed minimum TLAC requirements for G-Sibs unveiled at the G20 Brisbane summit in November 2014 was 16% to 20% of a group’s consolidated risk-weighted assets. This proposal was under consultation until February 2, 2015, when the requirement was finalized.
The TLAC should consist of instruments that can be written down or converted into equity in case of resolution: capital instruments (CET1, AdT1 and T2), together with long-term unsecured debt – subordinated and senior debt. Debt must be unsecured; have a minimum residual maturity of more than one year; arise through a contract; and be subordinated to liabilities that are explicitly excluded from TLAC.
The minimum TLAC requirement is in addition to minimum regulatory capital requirements, but qualifying capital may count towards both requirements, subject to conditions.
From 1 January 2019, the minimum TLAC requirement for G-Sibs will be at least 16% of the resolution group’s risk-weighted assets (RWA’s), increasing to at least 18% from 1 January 2022. Emerging market G-Sibs must meet the 16% RWA and 6% LRE Minimum TLAC requirement no later than 1 January 2025, and the 18% RWA and 6.75% LRE minimum TLAC requirement before 1 January 2028. The period for emerging market G-Sibs conformance will accelerate if, in the five years following publication of the term sheet, aggregated corporate debt issuance exceeds 55% of the economy’s GDP.