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    US Agencies Finalize Rule to Reduce Impact of Large Bank Failures

    October 20, 2020

    US Agencies adopted a final rule that applies to advanced approaches banking organizations and aims to reduce interconnectedness in the financial system as well as to reduce contagion risks associated with the failure of a global systemically important bank (G-SIB). The rule requires deduction from a banking organization’s regulatory capital for certain investments in unsecured debt instruments issued by foreign or U.S. G-SIBs for meeting the minimum total loss-absorbing capacity (TLAC) requirements. FED also adopted changes to its TLAC rules to clarify requirements and correct drafting errors. The final rule would become effective on April 01, 2021.

    U.S. G-SIBs as well as U.S. intermediate holding companies of foreign G-SIBs are required to issue debt with certain features under the “total loss-absorbing capacity,” or TLAC, rule of FED. That debt could be used to recapitalize the holding company during bankruptcy or resolution if it were to fail. To discourage the largest banking organizations from purchasing TLAC debt, the final rule prescribes a more stringent regulatory capital treatment for holdings of TLAC debt. Under the draft final rule, category I and category II banking organizations—firms with higher systemic importance—would face an additional requirement with respect to investments they have in TLAC or similar debt instruments issued by U.S. or foreign G-SIBs. Specifically, the rule provides a stringent treatment for such investments by requiring that they be deducted from a firm’s regulatory capital (deduction treatment). The rule excludes certain hedged and market making exposures from the deduction treatment. This treatment would be similar to the FED's current rule for investments in capital instruments issued by a financial institution. The draft of final rule is similar to the proposal from April 2019, with the following changes in response to comments:

    • The draft final rule would rely on the 2019 revisions to the market making framework established by the Volcker rule to identify market making exposures
    • Given their importance to market making, the draft final rule would not apply the deduction treatment to a limited amount of TLAC-related derivative exposures held for more than 30 business days.

    The rule also includes a revision to the TLAC requirements of FED that will require G-SIBs to publicly report their outstanding TLAC debt. The proposal included revisions to the FR Y-9C report to implement the deduction framework for exposures to TLAC debt instruments and to require U.S. G-SIBs and covered intermediate holding companies to disclose their ratios of TLAC and long-term debt that are required under the TLAC rule. FED proposed similar revisions earlier this year in the FR Y-14 report. The draft final rule finalizes these revisions to the FR Y-9C and FR Y-14 generally as proposed, along with minor technical modifications suggested by commenters. The final rule also requires changes to the call reports and the regulatory capital reporting for institutions subject to advanced capital adequacy framework (FFIEC 101), which are expected to be addressed in one or more separate Federal Register notices. 


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    Effective Date: April 01, 2021

    Keywords: Americas, US, Banking, Reporting, G-SIB, Regulatory Capital, TLAC, Systemic Risk, FR Y-9C, FR Y-14, Call Reports, Basel, US Agencies

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