Magazine article American Banker

Fed Board to Vote on Final TLAC Rule

Magazine article American Banker

Fed Board to Vote on Final TLAC Rule

Article excerpt

Byline: John Heltman

WASHINGTON -- The Federal Reserve Board is slated to vote next week on a final rule meant to help regulators recapitalize a major U.S. bank if it should run aground, one of the last major capital regulations that the agencies have yet to complete.

The rule, known as Total Loss Absorbing Capacity, or TLAC, was proposed more than a year ago and is an instrumental part of the Basel III strategy for preventing taxpayer bailouts of failing major banks. The Board will meet Dec. 15 to vote on the final rule.

The plan would require the largest U.S. banks -- known as Global Systemically Important Banks -- to hold certain levels of unsecured debt. If the bank fails, that debt could then be converted into equity, thus turning the debtholders into stakeholders in a successor institution and giving the Federal Deposit Insurance Corp. a runway with which to seize and unwind the failed bank.

Under the Fed's proposal, a G-SIB would have to hold either 18% of total risk-weighted assets or 9.5% of total leverage exposure in Tier 1 capital, in addition to a 1%-4.5% surcharge required as part of a separate rulemaking. The Fed estimated the funding cost of the rule to the G-SIBs at $680 million to $1.5 billion.

The proposal would also require TLAC debt to be issued by a "clean" bank holding company, meaning the overall parent entity of a GSIB or the U.S. subsidiary of a foreign GSIB would be prohibited from issuing short-term debt to third parties, holding derivatives or other contracts with external counterparties, holding liabilities guaranteed by its subsidiaries or guaranteeing its subsidiaries in such a way that creates "disruptive default, set-off, or netting rights for subsidiaries creditors. …

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