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22 February 2016

EBF comments on Federal Reserve Notice of proposed rulemaking for TLAC and related requirements for US G-SIBs and US IHCs of foreign G-SIBs

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The European Banking Federation strongly support the development of crisis management frameworks designed to minimize the impact of a bank’s failure on the financial system and wider economy without resort to public support.

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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