#TLAC – Page 2 – Federal Financial Analytics

6 09, 2023

FedFin on: Long-Term Debt Requirements

Arezou Rafikian2023-09-07T16:38:46-04:00September 6th, 2023|The Vault|

Building on an advance notice of proposed rulemaking, the banking agencies have issued several proposals to enhance the resolvability of large banking organizations not covered by stringent GSIB standards. Among these is a proposal mandating long-term debt (LTD) to increase regional-bank total loss-absorbing capacity (TLAC) and, the agencies believe, reduce resolution costs and/or increase the FDIC’s options, thus avoiding the systemic designation and costly resolutions that occurred for regional banks earlier this year. The LTD requirements for category II, III, and IV banking organizations do not go as far as those mandated for GSIBs, based instead exclusively on a “capital-refill” construct in which eligible LTD is issued in amounts the agencies believe sufficient to provide enough capital-equivalent funding to achieve the proposal’s expected results.

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

29 08, 2023

DAILY082923

Eliza Allen2023-08-29T16:55:20-04:00August 29th, 2023|2- Daily Briefing|

Agencies Advance Controversial Long-Term Debt, Resolution Proposals

The FDIC, OCC, and FRB today tackled several critical resolution issues in the wake of recent bank failures, proposals that raise strong objections from regional banks despite FDIC and FRB unanimity today on at least one of them. As anticipated, the FDIC and FRB approved an NPR that would impose minimum long-term debt requirements for banks and BHCs with assets over $100 billion, with the FDIC and Fed boards voting unanimously in favor even as FRB Gov. Bowman strongly dissented despite a three-year transition period. Similar to the ANPR floating this rule (see FSM Report RESOLVE48), the proposal would require large banks to hold a minimum amount of eligible long-term debt equal to the greater of six percent of risk weighted assets, 3.5% of average total consolidated assets, or 2.5% of total leverage exposure for banks subject to the SLR.

Daily082923.pdf…

22 08, 2023

FedFin on: GSIB Surcharge

Arezou Rafikian2023-08-23T10:19:58-04:00August 22nd, 2023|The Vault|

As anticipated in the wake of recent bank failures, the FRB has proposed a significant revision to the current rules calculating systemic-risk scores that lead to GSIB designation. These indicators are used not only for GSIB designation or a higher surcharge, but also for categorizing U.S. and foreign banks for other purposes and thus would also bring some banking organizations into categories subject to very strict prudential standards. The Board estimates that the overall impact of the changes to the surcharge and risk-scoring methodology are small and, regardless, warranted to enhance systemic resilience and consistency. It also estimates that the interaction of this new approach with certain liquidity and TLAC standards is generally minimal. However, the Fed has not assessed the relationship of scoring revisions to one way to calculate the GSIB charges, nor does the Board assess the cumulative impact of all of the changes proposed here in concert with its sweeping revisions to U.S. capital rules for all banking organizations with assets over $100 billion. It is also unclear how these changes in concert with all the others interact with the stress capital buffer applicable to large U.S.-domiciled banking organizations…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

22 08, 2023

GSIB22

Eliza Allen2023-08-22T10:19:26-04:00August 22nd, 2023|1- Financial Services Management|

GSIB Surcharge

As anticipated in the wake of recent bank failures, the FRB has proposed a significant revision to the current rules calculating systemic-risk scores that lead to GSIB designation. These indicators are used not only for GSIB designation or a higher surcharge, but also for categorizing U.S. and foreign banks for other purposes and thus would also bring some banking organizations into categories subject to very strict prudential standards. The Board estimates that the overall impact of the changes to the surcharge and risk-scoring methodology are small and, regardless, warranted to enhance systemic resilience and consistency. It also estimates that the interaction of this new approach with certain liquidity and TLAC standards is generally minimal. However, the Fed has not assessed the relationship of scoring revisions to one way to calculate the GSIB charges, nor does the Board assess the cumulative impact of all of the changes proposed here in concert with its sweeping revisions to U.S. capital rules for all banking organizations with assets over $100 billion. It is also unclear how these changes in concert with all the others interact with the stress capital buffer applicable to large U.S.-domiciled banking organizations. Despite the Fed’s conclusions, it seems likely that the total impact will be considerable in light of methodological problems in this proposal as well as those FedFin identified with the impact analysis for the capital rewrite.

GSIB22.pdf…

17 08, 2023

CAPITAL234

Eliza Allen2023-08-17T15:22:40-04:00August 17th, 2023|5- Client Report|

FedFin Assessment: What the Agencies Think the Rules Will do and Why Much of That is Wrong

With this report, we conclude our assessment of the regulatory-capital proposal with analysis of what the sum total of the credit (see FSM Report CAPITAL231), operational (see FSM Report OPSRISK22), and market (see FSM Report CAPITAL233) rules could do in the real world of banks, nonbanks, foreign banks, and complex market interconnections. Our first assessment of the proposal’s framework (see FSM Report CAPITAL230) provided the agencies’ quantitative-impact statement (QIS). Here, we evaluate the QIS, expand on the agencies’ qualitative conclusions, and add our own assessment of what might actually happen in the face of these sometimes-contradictory capital incentives.

CAPITAL234.pdf…

14 08, 2023

DAILY081423

Eliza Allen2023-08-14T16:36:42-04:00August 14th, 2023|2- Daily Briefing|

FDIC Finds Banks Well-Capitalized, Resilient

Today’s FDIC 2023 Risk Review concludes that banks were well capitalized as of Q1 2023 and have demonstrated resilience through weaker economic conditions, rising interest rates, high inflation, and this year’s financial turmoil even though industry performance moderated from 2022. Key risks on which the FDIC will focus include liquidity risks as well as the effects of bank failures on overall banking conditions and stability.

FDIC Plans Major Resolution, Insurance Rewrite

As anticipated, FDIC Chair Gruenberg’s speech today confirms that his agency and the Fed will soon propose a TLAC framework for regional banks akin to the long-term debt TLAC standards imposed on GSIBs (see FSM Report RESOLVE48). Mr. Gruenberg also indicated that the FDIC will soon propose a new version of its 2011 IDI resolution rules (see FSM Report LIVINGWILL8).

Daily081423.pdf…

4 08, 2023

Al080723

Eliza Allen2023-08-04T16:31:21-04:00August 4th, 2023|3- This Week|

A Crushing Capital Burden

No, we’re not talking about the proposals – enormous, complex, and in some cases ill-drafted and confusing though they are. We’re talking about how much work it’s taking to go beyond the top-line analyses and section-by-section repeats we’re seeing in so many releases to give you in-depth, strategy, and market-focused analyses of what key parts of the rules say and how they’ll redefine banking as we and the financial system know it. There’s much not to love about the current construct, but the complexity of the new capital framework makes it stunningly difficult not just for us, but we fear also for the regulators, to know if the new framework will prove a Frankenstein. When we finish our read of all the proposals’ sections and that for GSIBs, we’ll release a final, bottom-line strategic conclusion. Until then, it’s critical to understand each key part of the rule and how it defines individual business lines and the markets that depend on them.

Al080723.pdf…

4 08, 2023

FedFin on: Credit-Risk Capital Rewrite

Arezou Rafikian2023-08-04T13:41:04-04:00August 4th, 2023|The Vault|

In this report, we proceed from our assessment of the proposed regulatory capital framework to an analysis of the rules governing credit risk. In addition to eliminating the advanced approach, the proposal imposes higher standards for some assets than under the old standardized approach (SA) via new “expanded” requirements. As detailed here, many expanded risk weightings are higher than current requirements either due to specific risk-weighted assessments (RWAs) or definitions and additional restrictions. This contributes to the added capital costs identified by the banking agencies in their impact assessment, suggesting that lower risk weightings in the expanded approach reflected the reduced risks described in the proposal for other assets and will ultimately have little bearing on regulatory-capital requirements and thus ….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

4 08, 2023

CAPITAL231

Eliza Allen2023-08-04T13:40:43-04:00August 4th, 2023|1- Financial Services Management|

Credit-Risk Capital Rewrite

In this report, we proceed from our assessment of the proposed regulatory capital framework to an analysis of the rules governing credit risk. In addition to eliminating the advanced approach, the proposal imposes higher standards for some assets than under the old standardized approach (SA) via new “expanded” requirements. As detailed here, many expanded risk weightings are higher than current requirements either due to specific risk-weighted assessments (RWAs) or definitions and additional restrictions. This contributes to the added capital costs identified by the banking agencies in their impact assessment, suggesting that lower risk weightings in the expanded approach reflected the reduced risks described in the proposal for other assets and will ultimately have little bearing on regulatory-capital requirements and thus on the overall ability of banks to expand into lower-risk areas and compete more effectively with nonbanks and foreign banks. Big banks forced to abandon certain activities may expand others receiving capital discounts in the new rules, increasing their footprint in traditional banking in ways that may increase industry consolidation.

CAPITAL231.pdf…

27 07, 2023

DAILY072723

Eliza Allen2023-07-27T17:47:02-04:00July 27th, 2023|2- Daily Briefing|

FSB Tries to Calm CoCo Confusion

Doubtless responding to the CoCo chaos when Credit Suisse failed, the FSB today issued a report laying out how cross-border crisis-management groups are to handle unallocated TLAC (UTLAC) such as the “alternative Tier 1” bonds popular in the EU.

FDIC 3-2 Vote Presages Knock-Down Basel Battle

As anticipated, the FDIC today voted 3-2 to issue a sweeping rewrite of U.S. regulatory capital requirements.

Divided, Cautious Fed Advances End-Game, GSIB Rewrites

As anticipated, Gov. Bowman today voted against the new capital framework, as did Gov. Waller; as a result, the vote was 4-2.

Stablecoin Bill Advances, Compromises to Come

At a fiery HFSC markup today, Chairman McHenry (R-NC) announced that bipartisan negotiations had broken down largely due to the White House, choosing to proceed to a final package as he remains open to amendment before floor action.

House Republicans Skewer Basel Rules

Hill comment so far in response to the new capital rules is sparse.

Daily072723.pdf…