Basel Committee standard on banks' holdings of TLAC

Basel Committee standard on banks' holdings of TLAC

The Basel Committee has published its final standard on the regulatory treatment of banks’ investments in TLAC (total loss absorbing capacity).

Michelle Adcock

Banking prudential and ESG, EMA FS Regulatory Insight Centre

KPMG in the UK

Financial graphs with calculator

The essence of the standard is to extend the current rules – under which a bank’s holdings of regulatory capital issued by other banks is deducted (over and above some thresholds) from the holding bank’s regulatory capital – to holdings of TLAC that do not otherwise qualify as regulatory capital. Such holdings would be deducted from the holding bank’s own Tier 2 capital (note: not from the holding bank’s non-regulatory capital TLAC).

The detail is rather more complicated, not least because of likely national applications:

First, the scope of the Basel Committee standard is narrow. It applies only to TLAC issued by a G-SIB. And in terms of the banks holding such TLAC, it applies, like most Basel Committee standards, only to “internationally active banks”. It would be relatively easy to apply the standard to a wider range of banks that might hold TLAC issued by G-SIBs, for example to extend (as is the usual approach under EU legislation) the deduction rules to all credit institutions.

However, matters would become much more complicated if some countries extended the deduction approach to TLAC issued by D-SIBs, or indeed issued by any bank (just as the current deduction requirements apply to regulatory capital issued by any bank). For example, the EU might well do this with respect to the minimum requirement for own funds and eligible liabilities (MREL) issued by D-SIBs and some other banks to meet the bank-specific MREL requirements set out in the EU’s BRRD. Holding banks would then need to monitor closely which banks were included as issuers of MREL/TLAC, and which of an issuing bank’s liabilities counted towards the issuing bank’s MREL/TLAC.

Second, the operation of the various thresholds under which holdings of TLAC do not need to be deducted is quite complicated:

  1. the current threshold (of 10% of the holding bank’s own common equity) for not deducting holdings of other banks’ regulatory capital is simply extended to include holdings of G-SIBs’ TLAC.
  2. in addition, to assist market liquidity in TLAC instruments, G-SIBs can hold non-regulatory capital TLAC issued by other G-SIBs without deduction if these holdings are held in the trading book, any holding is sold within 30 days, and these holdings are less than 5% of the holding G-SIB’s common equity.
  3. if the holding bank is not a G-SIB, then (b) applies without the “sale within 30 days” requirement.

Third, for the purposes of applying deductions of holdings of TLAC, direct, indirect and synthetic holdings of TLAC instruments in both banking and trading books all count as holdings of TLAC, including all instruments ranking pari passu with subordinated forms of TLAC. G-SIBs will be expected to publish information on their own issuance of such instruments, but there is no such disclosure requirement on non-G-SIBs. So if a national authority extended the standard to holdings of TLAC issued by non-G-SIBs then it may be difficult for holding banks to calculate the amounts of TLAC they hold for each issuer.

Fourth, for G-SIBs only (unless the scope of the Basel Committee standard is extended by a national authority), reciprocal cross-holdings of TLAC between G-SIBs must be fully deducted from Tier 2 capital; and a G-SIB’s holdings of its own non-regulatory capital TLAC must be deducted from its own TLAC resources.

Fifth, the requirements do not take effect until 2019 (when minimum TLAC requirements come in for G-SIBs), and later for holdings of TLAC issued by G-SIBs from emerging market economies.

Finally, because Basel Committee standards can only apply to TLAC holdings by banks, there is nothing here about restricting holdings by other types of financial institution (for example, what are the implications for financial stability if banks’ TLAC is held primarily by insurance companies or pension funds?).

Final standard: TLAC holdings (PDF 201 KB)

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