The Financial Stability Board presented this consultation paper on Total Loss-Absorbing Capacity (TLAC) for global systemic banks.
The agreement is “a watershed in ending ‘too-big-to-fail’ for banks,” said Mark Carney, the governor of the Bank of England and chair of the FSB.
If the G20 agrees, then TLAC will be the new name of the game.
The document offers a suggested term sheet. Some highlights for external TLAC, which looks like a new Tier 3:
The quality of the the TLAC instruments:
– Liabilities that qualify as Minimum TLAC should be stable, long term claims that cannot be called at short or no notice.
– Eligible external TLAC must have a minimum remaining maturity of at least one year.
– Eligible external TLAC must be unsecured.
– Eligible external TLAC must not include: a. insured deposits; b. any liability that is callable on demand without supervisory approval; c. liabilities that are funded directly by the issuer or a related party of the issuer, except where the relevant home and host authorities in the CMG agree that it is consistent with the resolution strategy to count eligible liabilities issued to a parent of a resolution entity towards external TLAC; d. liabilities arising from derivatives or debt instruments with derivative-linked features, such as structured notes; e. liabilities arising other than through a contract, such as tax liabilities; f. liabilities which are preferred to normal senior unsecured creditors under the relevant insolvency law; or g. any other liabilities that, under the laws governing the issuing entity, cannot be effectively written down or converted into equity by the relevant resolution authority.
Ranking: To ensure that eligible external TLAC absorbs losses as described in the preceding paragraph, it must be:
a. contractually subordinated to all excluded liabilities on the balance sheet of the resolution entity. They may, however, rank senior to capital instruments, including Tier 2 subordinated debt, in the insolvency creditor hierarchy; or
b. junior in the statutory creditor hierarchy to all excluded liabilities on the balance sheet of the resolution entity; or
c. issued by a resolution entity which does not have excluded liabilities on its balance sheet (for example, a holding company) so that TLAC eligible liabilities are not pari passu or senior to any excluded liabilities. Therefore, there is no need for the TLAC issued from such a resolution entity itself to be contractually or statutorily subordinated.
– Eligible external TLAC must absorb losses prior to excluded liabilities in insolvency or in resolution.
– Eligible TLAC should contain a contractual trigger or be subject to a statutory mechanism which permits the relevant resolution authority to expose TLAC to loss or convert to equity in resolution.
– The Pillar 1 common Minimum TLAC requirement will be 16%-20% of the resolution group’s RWAs. This does not include any applicable regulatory capital buffers.
– The Pillar 1 Minimum TLAC requirement must also be at least twice the quantum of capital required to meet the relevant Tier 1 leverage ratio requirement – that is, if the Basel 3 leverage ratio were set at 3% for G-SIBs, at least 6% of the Basel 3 leverage ratio denominator.
– More than 33% of the TLAC minimum requirements shall consist of (i) tier 1 and tier 2 capital instruments in the form of debt plus (ii) other eligible TLAC that is not regulatory capital.
Buyer beware: Liabilities not included in TLAC remain subject to potential exposure to loss in resolution, in accordance with the applicable resolution law.
See here the announcement website.
See here the press release.