July 02, 2019

FSB published a report on technical review of the ongoing implementation of the total loss-absorbing capacity (TLAC) standard for global systemically important banks (G-SIBs) in resolution. The report highlights that, to date, only a few jurisdictions have implemented the TLAC standard, which went into effect in January 2019. Further efforts are needed to implement the TLAC standard fully and effectively and to determine the appropriate group-internal distribution of TLAC resources across home and host jurisdictions. Moreover, FSB sees no need to modify the TLAC standard at this time.

The report reviews the timeliness and consistency of adoption of the TLAC standard as well as the status of TLAC issuance and distribution in the market. It identifies factors impacting effective implementation and the steps that FSB plans to take to promote continued effective implementation. The key points highlighted in the review include the following:

  • The review concludes that progress in implementation has been steady and significant, in both the setting of external TLAC requirements by authorities and the issuance of external TLAC by G-SIBs. This has been instrumental in enhancing the resolvability of G-SIBs, strengthening cooperation between home and host authorities, and boosting market confidence in authorities’ capabilities to address “too-big-to-fail” (TBTF) risks. 
  • External TLAC requirements that meet or exceed 16% risk-weighted assets and 6% of the Basel III leverage ratio denominator are in force in the Banking Union, Canada, Hong Kong, Japan, Switzerland, the UK, and the U.S.
  • Estimates of issuance of TLAC by G-SIBs range between USD 350 and USD 400 billion per year for the past three years, in a variety of market conditions. As of 2018, most TLAC had been issued in USD (about 67%) and EUR (about 19%).
  • While the TLAC standard contains an expectation of a debt component, most jurisdictions do not have a firm requirement. Most jurisdictions allow for TLAC-eligible instruments to be issued under the third-country law, but insist on the inclusion of contractual recognition clauses and assurances that a bail-in of those instruments is enforceable.
  • More work remains to be done to fully implement the BCBS standard on TLAC holdings to reduce the risk of contagion between banks in the event of resolution. To date, only a few jurisdictions have implemented the TLAC standard, which went into effect in January 2019.

The review was informed by surveys of the home and host authorities of G-SIBs, responses to a call for public feedback, and discussions with stakeholders at a roundtable organized by FSB in September 2018. FSB will continue to monitor implementation of the TLAC standard and issuance of TLAC instruments and will report on the progress toward implementation at least annually. To support the effective implementation of TLAC standard, FSB will take stock of the range of practices of authorities and crisis management groups in implementing the TLAC standard—particularly with respect to internal TLAC pre-positioning, the management of non-pre-positioned TLAC, and the authorities’ approaches on the review of the TLAC-eligibility of instruments and their subordination. FSB will also review the Resolvability Assessment Process template to ensure that crisis management groups consider—as part of their resolvability assessments for each G-SIB—the quantity, quality, and group-wide distribution of TLAC resources.

 

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Keywords: International, Banking, TLAC Implementation, G-SIB, Basel III, Too Big to Fail, Resolution, TLAC, FSB

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