We have completed our assessment of the FSB’s proposed Total Loss-Absorption Capacity (TLAC) consultation, a critical element in the global plan to end too-big-to-fail finance. The TLAC proposal so far applies only to G-SIBs, but its cost – as much as $1.6 trillion in new issuances – shows how strategic this standard will prove. To be sure, global prospects for TLAC are uncertain, but the U.S. plans to advance it, moving quickly in 2015 in hopes of blunting GOP criticism that the Dodd-Frank framework does little meaningfully to curb TBTF in the U.S. Considered not just in its own right, but also in the context of other policy initiatives: TLAC raises the following critical issues
- Can G-SIBs issue enough eligible TLAC debt and still raise enough other liabilities to meet new liquidity requirements without taking on funding costs that force dramatic restructuring, including divestiture of the capital-markets activities that are particularly costly under both the liquidity rules and TLAC? Which non-banks pick up securities financing and broker-dealer operations and how do markets reconfigure as a result?
- What happens if banks stay in newly-costly businesses – e.g., clearing – but counterparties are not covered by TLAC and other risk-absorbers for which they are required to pay in their own resolution schemes?
- What is the relationship between operating subsidiaries like insured depositories and the BHC that needs to issue TLAC obligations? Will the U.S. mandate the “bail-up” requirements the FRB is contemplating so that insured depositories within a BHC have intermediate TLAC layers or will they receive downstreamed TLAC raised solely at the parent? In the latter case, does this make the bank – if not the BHC – still TBTF? How many activities will then be housed in subsidiary banks at what risk to whom?
- Can Eurozone banks form holding companies as TLAC contemplates and, if they do, will this further fragment Eurozone banking despite recent efforts to harmonize it under the ECB?
- Will foreign banks with subsidiaries in the U.S. need to raise significant TLAC even if their parents do so as well? Could this TLAC support a parent “bail-up” or would it be ring-fenced in the U.S., further distancing U.S. operations from their home-country parents and regulators? What is the cost of doing so?
- How should financial-market utilities under the FRB plan for TLAC? CCPs and others governed by the SEC or CFTC are unlikely to come under new resolutions standards for a considerable period of time, if at all, but the FRB is committed to the FSB framework and will move it as quickly as possible for FMUs in the payment arena. These institutions are usually cooperatives without separate market operations, meaning that TLAC poses an array of strategic questions.
If you would like to discuss how you might comment on or otherwise influence global action on TLAC or would like more information on these resolution requirements and their strategic impact, please email us at email@example.com or call 202-589-0880.