06 February 2015

EBF response to the FSB’s consultative document on Total Loss Absorbing Capacity

Although this is difficult to achieve, EBF encourages the efforts of the FSB to allow the framework to fit all existing banking structures and the different legal resolution regimes of different jurisdictions (special resolution regime and insolvency hierarchies).

EBF positively notes the indication that the final calibration of the standard needs to be well informed by the concurrent Quantitative Impact Study (QIS) and several markets impact studies. Specifically the calibration needs to factor in the broader regulatory reform agenda to ensure that the combined requirements do not place an excessive burden on the financial system and the economy beyond what constitutes a reasonable and affordable layer of loss absorbing liabilities funded by banks. Furthermore, the standard needs to consider local regulatory regimes and accommodate the wide diversity of banking models. EBF is particularly concerned that the subordination requirements, as currently drafted, would particularly impact EU banks and create distortions between jurisdictions.

The different impact assessment studies before the final calibration should enable regulators to assess how the TLAC requirement will fit in with the whole regulatory framework which has just been deeply strengthened and enhanced, with capital buffers, a leverage backstop and liquidity requirements.

Against this background, EBF wants to stress the following key points:

• The TLAC framework needs to be sufficiently flexible to take into account different legal structures, business models and resolution strategies in systemically important banks, and different regulatory measures that have already been introduced in the respective jurisdictions where the framework will be applied, in order to address “too big to fail”


• In particular, the consistency of the TLAC proposal with the European BRRD and MREL regime must be ensured. The current combination of the proposed TLAC rules, and those of BRRD, mean that few alternatives other than further and heavy issuance of capital instruments are available to many European banks. It is essential that a sufficient range of options to meet the TLAC requirements should be available to all banks


• The definition of the leverage based TLAC requirement should be clarified. The notion of ‘twice the leverage ratio’ is concerning, as it refers to a ratio that is still under development and of which the final level is still to be fixed. EBF suggests that it should be made clear that the leverage requirements intended as a backstop, and that to remain coherent with Basel III it should represent an overall restriction, meaning that additional buffers should not sit on top of this requirement


• EBF would suggest that this leverage-based requirement be set as a fixed number, i.e. the 6% referred to in the text, rather than as a multiplier of an as yet unknown number. This fixed number should also be fixed in a manner which respects a sensible balance between the RWA-based requirement and the leverage-based requirement, such that banks with different banking models (high or low risk intensity) are given space in which to manage their overall TLAC requirement


• Eligibility of debt to count towards TLAC: The proposal seems to favour legal structures based on existing “bank holding companies”. It may be the case that senior debt provided to bank operating subsidiaries by a non-operating holding company is considered to be structurally subordinated in the US, but this is not necessarily the case in other jurisdictions, including many in Europe. Holding company debt should of course be TLAC eligible if it meets the requirements for TLAC eligibility, but should not be considered ‘per se’ eligible. The same applies to contractually bail-inable and convertible debt, on condition that it is likely to still be available at the point of entry into resolution. The FSB should seek to build a TLAC framework that is neutral to different corporate structures and funding strategies, in order to avoid forcing certain types of banks to issue large quantities of subordinated debt or to change corporate structure simply to be able to meet TLAC requirements


• Prepositioning TLAC in cash in material subsidiaries should not be necessary if credible resolution strategies are in place. Prepositioning would further add the disadvantage of forcing deposit-funded banks to increase their leverage. If the FSB decides to take the proposal on prepositioning further, intra group guarantees should be considered as a means to fulfil at least parts of the prepositioning requirement

Full response

© EBF