Fitch: US TLAC Proposals Fortify Large Bank Opco Subsidiaries
The proposed TLAC requirement also includes minimum external long-term debt that serves to recapitalize the covered BHC under a resolution scenario. Final TLAC standards from the Financial Stability Board (FSB) are expected next week. Fitch expects that additional clarity on internal TLAC for major US foreign subsidiaries will be forthcoming after those rules are out.
Fitch believes that the TLAC requirements are positive for senior unsecured creditors and operating liabilities of the major domestic subsidiaries of the US G-SIBs. This view was reflected in the upgrades to the eight U.S. G-SIBs' major domestic subsidiaries' Issuer Default Ratings in May. The rating actions included the major subsidiaries of Bank of America, The Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo.
Under the proposed capital requirements, the eight G-SIBs subject to the proposed rule would be required to maintain minimum TLAC and it also requires that a minimum of that TLAC must be met with a certain amount of external long-term debt (LTD). Covered BHCs would be required to maintain TLAC at the greater of 18% of risk-weighted assets (RWA), plus an additional capital conservation buffer and 9.5% of total leverage exposure. This requirement will fall within or exceed the initially contemplated range of 16% to 20% outlined by the FSB's standard. Failure to meet the buffer requirement will limit a BHC's ability to distribute earnings, make capital distributions and bonus payments.
The minimum external LTD requirement is proposed at the greater of 6% of total RWA, plus the applicable G-SIB surcharge or 4.5% of total leverage exposure. Only "plain vanilla" senior unsecured debt issued to non-affiliates will qualify for this requirement. Structured notes, preferred stock and senior unsecured debt maturing within one year would be excluded. In addition, LTD maturing in one to two years would get a 50% haircut against this requirement. Banks would be prohibited from redeeming or repurchasing eligible long-term debt without prior approval from the Fed if the action would cause the bank to fall below its requirements.
The US proposal largely focuses on implementing the single point of entry (SPOE) resolution strategy as that is largely what the US G-SIBs' plans facilitate. However, the US regulators allow for multiple point of entry (MPOE) and also recognize that many intermediate holding companies of foreign banking organizations have parents that will have MPOE resolution strategies.
To ensure orderly resolution, the proposed rule includes "clean holding company" limitations. Such limitations at covered BHCs would incorporate the exclusion of short term debt and other qualifiers. To further discourage interconnectedness, the Fed also proposed a change to Regulation Q to require any Fed-regulated institution to deduct from its capital any investment in or exposure to unsecured debt issued by a covered BHC (G-SIB).
The Fed estimated the eight G-SIBs' aggregate current overall shortfall to meet the new TLAC proposal would be about $120 billion, of which about $100 billion would be related to the external LTD requirement. The Fed proposes an effective date of January 2019.
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