ABA, Groups: TLAC Proposal Would Be Too Costly

The federal banking agencies’ proposal for the eight U.S. global systemically important banks to increase their total loss absorbing capacity, or TLAC, would create a $363 billion shortfall in eligible TLAC and long-term debt — plus $622 billion in unrelated liabilities — by Jan. 1, 2019, a massive gap that would “be very expensive and perhaps impossible to cure…promptly,” according to ABA and several other trade groups in a comment letter Friday. While the groups endorsed the overall concept of requiring TLAC, they argued that the agencies’ approach would be counterproductive, disruptive and unnecessary.

The agencies’ TLAC proposal would require banks to issue supplemental instruments that can be called upon should the company fail and need to be wound down rapidly. Under the proposal, G-SIBs would be required to have outstanding minimum levels of long-term debt, convertible to equity during resolution to recapitalize the firm’s critical operations. The proposed debt requirement would complement existing regulatory capital to meet the required level of TLAC.

A domestic G-SIB would be required to have outstanding long-term debt amounting to at least 6 percent of risk-weighted assets (plus its Basel Committee-designated G-SIB surcharge) or 4.5 percent of its total leverage exposure, whichever is greater. A G-SIB’s TLAC amount would be either 18 percent of risk-weighted assets or 9.5 percent of its total leverage exposure, whichever is greater.

To improve the proposal, the trade groups urged the agencies to eliminate separate long-term debt requirements, appropriately calibrate the required TLAC amounts, eliminate or limit the TLAC supplementary leverage ratio, eliminate restrictions on capital structure liabilities, permit appropriate grandfathering as TLAC is phased in and avoid imposing any domestic internal TLAC requirement. The groups also sent separate comments on TLAC requirements for U.S.-based operations of foreign G-SIBs. For more information, contact ABA’s Hu Benton.