IIF Authors

Status: Will be live at 02/02/2015 00:00

IIF-GFMA Joint Response to TLAC Consultation

Monday, February 2, 2015

On February 2, the IIF and the GFMA jointly submitted a letter to the Financial Stability Board ("FSB") on the Consultative Document "dequacy of loss-absorbing capacity of global systemically important banks in resolution" ("TLAC"). In general, the industry supports the concept that the FSB has developed. Assuring that loss-absorbing capacity is available if a G-SIB needs to be resolved is something the industry agrees to be essential. Nevertheless, a reform of this magnitude naturally raises many practical issues that have to be considered during the implementation of the new TLAC concept. Thematically, the most important areas include:

  • Historical evidence suggests that 16% of risk-weighted assets will be a sufficient level of TLAC to absorb potential losses for G-SIBs in the future.
  • The current drafting of TLAC subordination requirements raises important implementation difficulties, both for groups funded via holding company structures and for groups funded at the operating parent company or bank level.
  • The disposition of Internal TLAC will involve a delicate balancing of home and host regulatory interests, ideally aligning these interests to support cross-border cooperation. It will take careful drafting to avoid the risk that some elements could lead to undue fragmentation and potentially weaken the resilience of some firms.
  • Upon implementation, we estimate the new framework will govern about USD 4 trillion in TLAC-eligible securities. For issuance at this scale to be effective, it will need to be supported by broad, deep, liquid and diverse markets. We make several recommendations in this light regarding investor eligibility, market making, subordination and structural flexibility.

These issues are explained in detail in' the joint' comment letter.