On August 20, the IIF, along with BPI and GFMA, submitted comments to the FSB on its consultation on the technical implementation of the FSB's standard on the adequacy of total loss-absorbing and recapitalization capacity for Global Systemically Important Banks ("G-SIBs") in resolution (the "TLAC standard").
The letter supports the consistent global implementation of a well-constructed TLAC standard, which we believe will, together with other post-crisis resiliency enhancements and actions taken by the firms themselves, secure a durable end to the risk of "too big to fail." From a private sector perspective, the G-SIBs have, as a group, made significant strides in meeting the TLAC standard.
The letter also raises a number of issues to ensure consistency, including:
With respect to steps taken by the official sector towards implementation of the TLAC standard, all G-SIB home jurisdictions have implemented, or are in the process of implementing, external standards in line with the FSB's Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution: Total Loss-absorbing Capacity (TLAC) Term Sheet ("TLAC Term Sheet"). However, as each relevant home and host jurisdiction translates the provisions of the TLAC Term Sheet into local regulation, certain trends in implementation that could have significant consequences have become apparent in the approaches regulators are taking to certain key provisions. In particular, with respect to the calibration of internal TLAC for a material sub-group in a host jurisdiction, the TLAC Term Sheet specifies a bounded range of 75% to 90% of the external TLAC requirement that would apply if the material sub-group were a resolution group. However, while regulators in certain jurisdictions have calibrated or propose calibrating internal TLAC presumptively at the low end of the range-i.e., 75%, at least one jurisdiction has issued a final rule uniformly calibrating internal TLAC near the high end of the range-i.e., 90%.
We believe that the imposition by G-SIB host jurisdictions of internal TLAC requirements that default to the most stringent calibration contemplated by the TLAC Term Sheet increases the risk that, in an actual financial distress scenario, the formulaic distribution of internal TLAC would not match the actual distribution of losses incurred ("misallocation risk"). Therefore, a principal recommendation of this letter concerns the need for concerted global cooperation in setting appropriate levels of internal TLAC as jurisdictions move forward with implementation. As a general matter, we request that the FSB consider issuing further guidance to encourage global cooperation and further harmonization of TLAC standards across jurisdictions, as further elaborated below.
Constructing an effective TLAC framework involves both questions of amount and questions related to structure and composition.
With respect to amount, we acknowledge the recent positive movements by global authorities. Specifically, Vice Chairman Randal Quarles of the US Board of Governors of the Federal Reserve System ("Federal Reserve") recently expressed openness to calibration of internal TLAC for the US IHCs of non-US G-SIBs at a starting point of 75%, down from the current US calibration. The European Parliament Committee on Economic and Monetary Affairs also recently released a legislative draft that would allow internal TLAC calibration in the 75% to 90% range, in contrast to the fixed 90% calibration that was specified for non-EU G-SIBs in the original 2016 European Commission proposal. We urge the FSB to reinforce this positive trend by issuing further guidance strongly endorsing the presumptive calibration of on-balance sheet internal TLAC at 75%. With respect to structure and composition, we believe that a mix of funded prepositioning and contractual agreements (including agreements along the lines of the secured support agreements ("SSAs") used by the US G-SIBs) will also be critical.