“Last November, the Financial Stability Board (FSB)1 released a proposal to put in place a new international failure resolution regime designed to address the too-big-to-fail challenge posed by the largest global banks. The FSB’s consultative document, which was endorsed by the United States and others at the Group of Twenty (G20) Leaders’ summit in Brisbane, Australia, proposes the creation of a new set of international capital buffers, over-and-above those currently prescribed through the Basel III agreement. These capital buffers – known as total loss-absorbing capacity, or TLAC—would serve to absorb losses of a failing global systemically important bank (G-SIB) so that it can be resolved in an orderly fashion without posing a threat to systemic stability or requiring taxpayers to “bailout” the firm (read our earlier blog post on the proposal).
“Since the fall, the FSB received comment letters from at least 50 stakeholders – ranging from industry representatives to financial reform advocates – on the TLAC plan. The responses largely welcomed the TLAC proposal as a key piece of the puzzle in ending the “too-big-to-fail” problem. However, many stakeholders expressed concerns that parts of the proposed TLAC framework could undermine effective cross-border resolution, lead to competitive inequities, were insufficiently transparent to investors and could have adverse impacts on the real-economy. Below is a brief summary of many of the key comment letters2 grouped by their responses to several high profile issues. You may find areas of expected disagreement, expected agreement, and some unexpected agreement.”
“Another concern that is widely expressed across both industry and non-industry letters is that the internal TLAC requirement should not act as a substitute for international cooperation on resolution issues. That is, the “host” and “home” regulators should agree ex ante on procedures for resolving the group and its subsidiaries so that they avoid engaging in ring-fencing activities that could result in the failure of the group or a major entity within it. Better Markets suggests reform of CMGs, which are a key forum for such cooperation. Currently, membership in these groups is restricted to authorities that are material to the effective resolution of the firm, meaning – by the FSB’s own admission – that “host jurisdictions where a G-SIB has a systemic presence” could be excluded.3 Better Markets advocates that the FSB adopt a more inclusive approach to membership in these groups in order to avoid “domestic ring fencing, collateral seizure and similar activities” in a crisis.”
“In its consultative document, the FSB stated investors should have a clear understanding of “how losses are absorbed and by whom and in which order”; in short, investors should know if and under what circumstances they will bear the firm’s losses. This transparency would, in the FSB’s view, “enhance the credibility and feasibility of resolution and strengthen market discipline.” While welcoming this commitment to disclosure, The Systemic Risk Council, S&P, and Better Markets all call on the FSB to ensure increased transparency and accessibility of TLAC instruments. S&P and Better Markets suggest that there should be common standards for the disclosure of the “pecking order” of various types of liabilities included in TLAC; i.e., what classes of liabilities are liable for losses first. Better Markets would also like full disclosure of the entire corporate structure of the group so that “investors and regulators can see the ownership, control, and inter-relationships of each entity” within it.”
Read the full Bipartisan Policy Center blog post by Peter Ryan here.