FED Revises Definition of Eligible Retained Income in TLAC Rule
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.
Related Links
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
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
RBI Issues Circular on Large Exposures Framework for BanksRelated Articles
EBA Launches Stress Tests for Banks, Issues Other Updates
The European Banking Authority (EBA) launched the 2023 European Union (EU)-wide stress test, published annual reports on minimum requirement for own funds and eligible liabilities (MREL) and high earners with data as of December 2021.
EBA Proposes Standards for IRRBB Reporting Under Basel Framework
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
FED Issues Further Details on Pilot Climate Scenario Analysis Exercise
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.