The Financial Stability Board has worked hard to complete its total loss-absorbing capacity rules for banks, and individual jurisdictions must ensure clear and co-ordinated implementation. 

The G20 nations in November 2015 approved the Financial Stability Board’s (FSB) final term sheet for total loss-absorbing capacity (TLAC) – the layer of capital and debt that can be bailed in to recapitalise a distressed systemic bank in resolution. The FSB has worked hard to accommodate the concerns expressed by banks after a first draft was published a year earlier.

The full compliance deadline has been extended by three years (to 2022) to allow more time for investors to absorb the new, TLAC-eligible securities that banks will need to issue to meet any shortfalls. The FSB has sought ways to ensure a level playing field between banks with single point of entry resolution plans – rolling up the bank from the top – or those with a multiple point of entry resolution approach that would be broken up into separate units. And regulators have also clarified ways to ensure TLAC is subordinated to other obligations, such as operational liabilities, that cannot be bailed in during a resolution.

All of this is positive, and the regulators’ own quantitative impact study suggests the transition to TLAC will be challenging, but manageable. However, the framework maintains a significant amount of discretion for the home and host supervisors of each global systemically important bank (GSIB). Particularly sensitive is the concept of pre-positioning, whereby banks will need to place in their material sub-groups part of the TLAC that would be needed if the sub-group operated as a standalone resolution entity. The FSB set a range of 75% to 90% for this pre-positioning, to be decided by home and host supervisors in co-operation through a crisis management group (CMG).

In addition to pre-positioning, CMGs are also supposed to discuss any TLAC add-ons above the FSB minimum that individual jurisdictions may choose to apply. Hence, these groups will have considerable responsibility for ensuring that the structure and distribution of TLAC within each GSIB remains flexible enough to avoid making the institution more brittle when faced with shocks in individual parts of the group.

The FSB has also launched a consultation on the provision of emergency funding from central banks to the critical functions of a GSIB undergoing resolution. Here again, building trust and a common approach among CMG members will be vital to ensuring a clean process.

The FSB has made great strides in developing a set of basic standards for GSIB resolution. Its individual member regulators must now pick up the baton by applying those standards in a transparent and co-ordinated fashion, for the sake of both banks and their investors.

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