Fed Approves Final TLAC Rule

The Federal Reserve Board today finalized a rule on how much total loss absorbing capacity, or TLAC, the eight U.S. global systemically important banks are required to hold. The purpose of the rule is to ensure that banks have a minimum level of long-term debt instruments that can be called upon should the company fail and need to be wound down rapidly.

Under the rule, banks will be required to issue a minimum level of long-term debt that would complement existing Tier 1 regulatory capital to meet the required level of TLAC. Domestic G-SIBs would be required to have an 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 7.5 percent of its total leverage exposure, whichever is greater.

The rule also stipulates the debt must be issued at the bank holding company level, and prevents the holding company from entering into certain financial arrangements that could stand in the way of orderly resolution, such as the issuance of short-term debt to external investors or the entrance into derivatives or other types of financial contracts with external counterparties.

One significant change in the final rule is the inclusion a provision allowing banks to “grandfather in” debts that are governed by foreign law or contain certain acceleration clauses and were issued prior to Dec. 31, 2016. Because of this change, the final rule also removes the longer phase-in period that was originally proposed, and sets the final compliance date for Jan. 1, 2019. The rule is expected to cost banks between $680 million and $2 billion.

“Today’s final rule caps the dramatic regulatory changes that have been made to reinforce our nation’s policy that no bank should be too big to fail. The TLAC resources — combined with higher capital and liquidity requirements, stress testing, recovery and resolution planning — ensure that the system is better prepared to withstand shocks and has a viable framework in place to handle them,” said ABA President and CEO Rob Nichols. “However, since the final rule will inevitably limit the covered banks’ flexibility in managing their funding, and the markets’ reaction will be critically important, we will continue to examine how the existing regulatory framework, including the TLAC requirement, balances strong, effective regulation with the need to ensure that banks can effectively support economic growth and opportunity.” For more information, contact ABA’s Hu Benton.