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    FED Revises Definition of Eligible Retained Income in TLAC Rule

    March 23, 2020

    In light of recent disruptions in economic conditions due to the COVID-19 outbreak, FED issued an interim final rule that revises the definition of eligible retained income for the purposes of the total loss-absorbing capacity (TLAC) rule of FED. The revised definition of eligible retained income will make any automatic limitations on capital distributions that could apply under the TLAC rule more gradual and aligns with the recent action taken by US Agencies (FDIC, FED, and OCC) with respect to the regulatory capital rule. The interim final rule will be effective on its publication in the Federal Register. Comments on the interim final rule must be received no later than 45 days after its publication in the Federal Register.

    US Agencies (FDIC, FED, and OCC) recently revised a core aspect of the buffer requirements in the capital rule, the definition of “eligible retained income.” FED is now issuing this interim final rule to carry over this change to the TLAC buffer requirements. By modifying the definition of eligible retained income and, thus, allowing the covered companies to use their capital buffers in a more gradual manner, the interim final rule should help to promote lending activity and other financial intermediation activities by covered companies and avoid compounding negative impact on the financial markets. The interim final rule revises the definition of eligible retained income in the TLAC rule to the greater of

    • A covered company’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and
    • The average of a covered company’s net income over the preceding four quarters.

    This definition will apply with respect to all of the TLAC buffer requirements under the TLAC rule. The interim final rule is intended to facilitate use, by a covered company, of TLAC buffers as intended and to serve as a financial intermediary and source of credit to the economy. As noted, this revision would reduce the likelihood that a covered company is suddenly subject to abrupt and restrictive distribution limitations in a scenario of lower than expected TLAC levels.

    The revised definition of eligible net income in the interim final rule allows a covered company to more gradually reduce distributions as it enters stress and provides a covered company with stronger incentives to continue to lend in such a scenario. Also by enabling a covered company to gradually decrease capital distributions as it enters stress (rather than mandating a sharp decrease), the rule could incrementally reduce the covered company’s loss-absorption capacity in stress. The definition of eligible retained income affects the distributions of covered companies with TLAC levels within their TLAC buffer requirements. It does not have an impact on minimum TLAC or long-term debt levels. As such, the revised definition of eligible retained income in the interim final rule is not likely to have any noticeable effect on the TLAC or long-term debt requirements applicable to covered companies.

     

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    Comment Due Date: FR+45 Days

    Effective Date: Date of Publication in FR

    Keywords: Americas, US, Banking, Regulatory Capital, COVID 19, TLAC, Loss-Absorbing Capacity, Basel III, Eligible Retained Income, Interim Rule, FED

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