Total loss-absorbing capacity (TLAC)
Total loss-absorbing capacity is an international standard, finalised by the Financial Stability Board (FSB) in November 2015, intended to ensure that global systemically important banks (G-Sibs) have enough equity and bail-in debt to pass losses to investors and minimise the risk of a government bailout.
From January 1, 2019, G-Sibs are required to hold a TLAC amount of 16% in terms of risk-weighted assets (RWAs), or 6% of the leverage exposure measure. This increases to 18% of RWAs, or 6.75% of leverage exposure by January 1, 2022. National regulators may interpret the requirements more strictly in their own jurisdictions.
Instruments that count as TLAC need to be able to be written down or converted into equity to recapitalise the entity as it goes through resolution, and so must not be vulnerable to legal challenges. Securities that are eligible to be held as TLAC include common equity, subordinated debt and some senior debt. They must be unsecured liabilities with a maturity of at least one year. The FSB standard also demands that at least 33% of TLAC be filled with debt instruments, with equity amounting to a maximum of 67%.
Whether a bank is a holding company or an operating company has an impact on its TLAC requirements, as does whether its resolution plan puts in place a single point of entry or multiple point of entry resolution process, as these affect the location of TLAC within a resolution group. The FSB recommended that a significant foreign subsidiary that forms part of a cross-border resolution entity should pre-position TLAC at the local level, equivalent to between 75% and 90% of what its standalone TLAC requirement would be. This is intended to provide incentives for home and host resolution authorities to cooperate in the event of the G-Sib’s failure.
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