Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.5.3.3:2.5.3.3 The introduction of the TLAC requirement for G-SIBs

Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.5.3.3

2.5.3.3 The introduction of the TLAC requirement for G-SIBs

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On 9 November 2015, the FSB published the Total Loss-absorbing Capacity (TLAC) Term Sheet (the TLAC Standard) which requires G-SIBs to hold a sufficient amount of highly loss absorbing (bail-inable) liabilities to ensure smooth and fast absorption of losses and recapitalisation in resolution.1 The introduction of a common minimum for G-SIBs was deemed necessary to help achieve a level playing field internationally and to ensure that there is market confidence that each G-SIB has a minimum amount of loss-absorbing capacity that would be available to absorb losses and recapitalise it in resolution.2

CRR II, BRRD II and SRMR II implement the TLAC standard for EU G-SIIs and integrate the TLAC requirement into the general MREL rules.3 TLAC and MREL pursue the same regulatory objective (which is to enhance effectiveness of resolution by requiring banks to hold sufficient amounts of readily bail-inable liabilities). There are however some differences:

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The scope of application of MREL covers all banks and not only G-SIIs;

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The TLAC standard contains a harmonised minimum level – which is referred to as a Pillar 1 approach –, while the level of MREL is determined by resolution authorities on the basis of a case-by-case institution specific assessment – which is referred to as a Pillar 2 approach –;

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The minimum TLAC requirement should in principle be met with subordinated debt instruments, while for the purposes of MREL sub ordination of debt instruments can be required by resolution authorities on a case-by-case basis.4

The TLAC requirement for G-SIIs is included in Article 92a CRR II.5 In accordance with Article 92a CRR II the TLAC requirement is a combination of (i) a risk-based ratio of 18%, representing the own funds and eligible liabilities of the bank expressed as a percentage of the TREA, and (ii) a non-risk-based ratio of 6.75%, representing the own funds and eligible liabilities of the bank expressed as a percentage of the total exposure measure.6

The MREL for G-SIIs will be set at the same level as the TLAC. Article 45d BRRD II and Article 12e SRMR II specify that the MREL of a resolution entity that is a G-SII or part of a G-SII will consist of the TLAC requirement. In addition thereto the resolution authorities can determine to impose an additional requirement for own funds and eligible liabilities specific to the entity.7 These may be imposed when the TLAC requirement is not sufficient to fulfil the regulatory objective of the MREL and to an extent that the amount of required own funds and eligible liabilities does not exceed a level that is necessary to fulfil the regulatory objective of the MREL.8 See further the next section.

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