For these reasons, the EBF has supported the international work led by the Financial Stability Board to set minimum standards for the Total Loss Absorbing Capacity (TLAC) for the largest, most globally significant banks. EBF believes implementation of the TLAC standard will advance the Federal Reserve Board’s (Board) goal of ensuring sufficient resources are available in the U.S. to facilitate the resolution of covered entities and mitigate risks to U.S. financial stability arising from the failure of such entities.
In this regard EBF Members wish to express their support with regard to the conclusions of the detailed comment letter that will be submitted by the Institute of International Bankers (IIB). Nevertheless, as a representative body for the European banking sector, EBF wishes to also highlight some specific concerns regarding the Board’s Proposed Rulemaking on TLAC, particularly as they relate to requirements for covered Intermediate Holding Companies (IHC) of Foreign Banking Organisations (FBOs). In particular, EBF notes that the proposal imposes different treatment to foreign-controlled banks and their IHCs compared to US Bank Holding Companies.
The proposal would require the IHCs of non-U.S. G-SIBs to meet their US TLAC requirement exclusively through the issuance of internal TLAC instruments. The Notice of Proposed Rulemaking seeks to justify this approach by stating that it is intended to reduce the risks of financial instability in the US and ensure that the foreign parent continues to own the US IHC post-resolution, avoiding the complexities of a change of control for the subsidiary post-resolution. EBF believes that the proposed steps are unnecessary to achieve the goals mentioned:
Threat to US Financial Stability: The non-branch operations of significantly important FBOs in the US are required to be structured with an IHC. The IHC has the effect of protecting the operating entity, such as a bank, and the day-to-day financial system from the effects of any resolution. As would be the case for a US BHC, losses would be up-streamed from the bank to the shareholders in the IHC to absorb losses without the continuity of operations in the underlying operating entities, such as banks or broker-dealers being affected. This is a chain of ownership and structural subordination which has been promoted by the FSB and the US authorities themselves.
Risk of Change of Control: The Fed also indicates that a change in the control of the US entity “could create additional and undesirable regulatory and management complexity during a failure scenario”. EBF believeS that the US Authorities face change of control risks in any scenario since a resolution at the Holding Company level could also lead to a change in the control of the Group and, therefore, indirectly of the US entity. Even if the IHC was fully funded via internal instruments a resolution undertaken at the level of the parent would be anticipated to change control of the parent (from the existing equity holders to the holders of TLAC instruments) and hence the control of the US IHC would also be changed.
Given that the NPR permits US GSIBs to issue external TLAC, EBF believes that IHCs, which pose lower systemic risk in comparison, should also have this possibility open to them. This is particularly relevant for non-US GSIB’s that have a MPE resolution strategy.
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