OREANDA-NEWS. Fitch Ratings says the final total loss absorbing capacity (TLAC) rules could benefit the Issuer Default Ratings (IDR) of some of the 30 global systemically important banks (G-SIB). TLAC will also generally benefit bank counterparties more than senior bondholders and is more likely to be neutral for bank senior debt ratings.

The Financial Stability Board published its final TLAC standards today. They are broadly in line with the 2014 proposals, with the common external TLAC requirement settling at the higher of 18% of risk-weighted assets (RWA) and 6.75% of leverage exposure by 2022.

A bank's IDR and senior debt ratings could benefit if TLAC is met with regulatory capital debt or more equity. Otherwise, existing senior debt ratings are only likely to benefit from TLAC rules if a bank issues large volumes of new 'senior subordinated' debt that is contractually or statutorily subordinated to existing senior debt.

In Europe, Germany is subordinating existing and new senior debt to other senior liabilities, ensuring its TLAC eligibility. Italy is considering full depositor preference, in which case senior debt can still be TLAC-eligible if equally ranking excluded liabilities are small. The likes of France and Spain could also adopt a statutory approach to subordinating existing and/or only new senior debt, either singly or as part of a broader euro area harmonisation initiative.

Revisiting the Bank Recovery and Resolution Directive (BRRD) to subordinate senior debt across the EU, extend depositor protection and more closely align similar "minimum requirement for own funds and eligible liabilities" (MREL) bail-in buffer rules with TLAC also cannot be ruled out.

Banks operating under a holding company model are structurally well placed to meet TLAC rules. This is the case for those US, UK and Swiss G-SIBs operating a single point of entry resolution strategy. By down-streaming debt to operating subsidiaries, senior creditors of some major operating subsidiaries will be better protected than creditors of the holding company through structural subordination. We upgraded the IDRs of domestic operating subsidiaries of the eight US G-SIBs' in May 2015 to reflect this. Senior bondholders will be concentrated at the holding company level and ratings are likely to be unaffected by TLAC unless common equity double leverage becomes excessive.

An emerging market exemption for full compliance lasts until 2028, but will be accelerated if financial and non-financial corporate debt securities, excluding policy banks, exceed 55% of GDP. In any case, TLAC does not affect the four Chinese G-SIBs' sovereign-support-driven IDRs. The Japanese G-SIBs are likely to be beneficiaries of the proposed 3.5% of RWA TLAC contribution available where there are ex-ante commitments to recapitalise a G-SIB with pre-funded industry contributions. Their ratings are not expected to be affected by TLAC.

Switzerland recently formalised TLAC requirements for UBS and Credit Suisse, while the US recently proposed TLAC requirements for its 8 G-SIBs and for subsidiaries of foreign G-SIBs.