Today, March 23, 2020, the Federal Reserve issued an interim final rule that revises the definition of “eligible retained income” for purposes of the total loss-absorbing capacity (“TLAC”) buffer requirements that apply to global systemically important banking organizations (“G-SIBs”).  The rule amends the “eligible retained income” definition in the same manner as the federal banking agencies’ interim final rule of March 17, 2020, which, as we summarized previously, revised that definition for purposes of the regulatory capital rules that apply to all U.S. banking organizations.

Continue Reading Federal Reserve Eases Application of TLAC Buffer

On April 2, 2019, the federal banking agencies proposed a rule that would require large banking organizations to deduct from their regulatory capital certain investments in total loss-absorbing capacity (“TLAC”) debt issued by global systemically important banking organizations (“G-SIBs”) rather than to risk-weight such investments as is currently done.  The rule is intended to reduce interconnectedness in the financial system by discouraging (but not prohibiting) banking organizations from investing in G-SIBs’ debt, and therefore has important implications for the marketability and liquidity of debt instruments that G-SIBs are required to issue under the Federal Reserve’s TLAC requirements.

In a chart accompanying this blog post, we have compared the key parameters of the interagency proposal to the deduction requirements included in the Federal Reserve’s 2015 TLAC proposal and the Basel Committee’s 2016 final standard.  Comments on the interagency proposal are due June 7, 2019.

Continue Reading Federal Banking Agencies Propose TLAC Deduction Standard

On March 29, 2019, the board of the FDIC approved a notice of proposed rulemaking that would revise the supplementary leverage ratio (“SLR”) to exclude certain deposits placed at central banks from custodial banks’ SLR denominators, implementing section 402 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”).  The OCC and Federal Reserve are expected to adopt substantially identical proposals.

Continue Reading Agencies to Revise SLR to Exclude Custodial Deposits at Central Banks

On December 15, 2016, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) issued a final rule requiring global systemically important banking organizations (“G-SIBs”) to issue minimum amounts of “plain vanilla” unsecured long-term debt and total loss-absorbing capacity (“TLAC”) instruments, and to maintain so-called “clean” holding companies that have no “runnable” liabilities.

The final rule represents a significant post-crisis milestone for the Federal Reserve and G-SIBs in structuring G-SIBs’ balance sheets to minimize the likelihood and systemic impact of failure.  In particular, the long-term debt and clean holding company requirements facilitate the “single point of entry” resolution strategy favored by most U.S. G-SIBs.  The requirements do so by providing, through structural subordination, for all losses to be imposed on the holding company’s equity and long-term debt-holders, which cannot run, before they are imposed on the creditors of the holding company’s material subsidiaries, including short-term creditors that can run.  As a result, in the event of the insolvency or bankruptcy of the holding company, such structural subordination of the large required amount of holding company equity and long-term debt will allow material subsidiaries such as banks and broker-dealers to continue to operate with a substantially reduced risk of runs or disruptions in funding.  The large required amount of TLAC will also allow the holding company, after absorbing all losses in bankruptcy or insolvency proceedings, to reorganize and recapitalize through the conversion of remaining long-term debt into equity.

Continue Reading Federal Reserve Issues Final Standard for Long-Term Debt, Total Loss Absorbing Capacity, and Clean Holding Company Requirements for Largest Banking Organizations

Today, the Basel Committee on Banking Supervision issued its final standard on the regulatory capital treatment of banking organizations’ holdings of Total Loss Absorbing Capacity (“TLAC”) and related instruments issued by global systemically important banking organizations (“G-SIBs”).  The final standard has important implications for the marketability and liquidity of TLAC and other instruments that G-SIBs are required to issue under standards released by the Financial Stability Board (“FSB”) in November 2015.

Continue Reading Basel Committee Specifies Regulatory Capital Treatment of TLAC Holdings