The world’s largest banks would need to collectively add as much as $1.2 trillion to their existing capital buffers to comply with a new rule issued on Monday by the Financial Stability Board, a consortium of regulators from the G20 nations.
FSB’s final Total Loss-Absorbing Capacity (TLAC) standard applies to global systemically important banks (G-SIBs) and is intended to ensure they have sufficient loss-absorbing and recapitalization capacity available if regulators must step in to wind down their assets and oversee “an orderly resolution that minimizes impacts on financial stability, maintains the continuity of critical functions, and avoids exposing public funds to loss.”
Alongside regulatory standards established by the Basel III framework, G-SIBs will be required to hold at least 16 percent of their risk-weighted assets in equity and debt as a capital cushion by Jan. 1, 2019. The required buffer increases to 18% in January 2022. The rules also boosts the leverage ratio of capital held by a bank against its total assets to 6 percent by 2019; 6.75 percent by 2022. Banks in China and emerging markets, expected to face the greatest financial hit, will have until 2028 to meet the TLAC requirements.
"This new standard, which will be implemented in all FSB jurisdictions, is an essential element for ending too-big-to-fail for banks,” Mark Carney, FSB chairman and governor of the Bank of England said in a statement.
The international demands follow a Nov. 2 rule proposal by the Board of Governors of the Federal Reserve that seeks to increase the loss absorbing capacity of systemically important U.S. bank holding companies and the domestic operations of systemically important foreign banks.
The Fed’s TLAC proposal requires covered institutions to maintain a minimum amount of long-term debt that could be converted into equity in the event of a failure. The proposed rule also requires the parent holding company of a domestic GSIB (global systemically important bank holding company) to avoid entering into financial arrangements that would create obstacles to an orderly resolution. These "clean holding company" requirements would include bans on the issuance of short-term debt to external investors and on entering into derivatives and certain other types of financial contracts with external counterparties. The moves are intended to reduce the risk of destabilizing funding runs at the holding company, reduce holding company complexity, and enhance the resiliency of operating subsidiaries during an orderly resolution.
Domestic GSIBs would be required to hold long-term debt amount of the greater of 6 percent plus its GSIB surcharge of risk-weighted assets and 4.5 percent of total leverage exposure; and a TLAC amount of the greater of 18 percent of risk-weighted assets and 9.5 percent of total leverage exposure.
The U.S. operations of foreign GSIBs generally would be required to hold” a long-term debt amount of the greater of 7 percent of risk-weighted assets and 3 percent of total leverage exposure and 4 percent of average total consolidated assets; and a TLAC amount of the greater of 16 percent of risk-weighted assets and 6 percent of total leverage exposure and 8 percent of average total consolidated assets.
The eight firms currently identified as U.S. GSIBs are Bank of America, Bank of New York Mellon Corporation, Citigroup, Goldman Sachs Group, JP Morgan Chase, Morgan Stanley, State Street, and Wells Fargo.