Is there a requirement for banks to hold gone concern capital (“TLAC”)?
Banking & Finance (2nd edition)
New standards on the total loss-absorbing capacity (TLAC) of global systemically important institutions (G-SIIs) on and a mandatory Pillar 1 subordinated MREL requirement for GSIIs were agreed upon.
The Financial Stability Board's standards on Total Loss-Absorbing Capacity (‘’TLAC’’) have not yet been implemented in Cyprus. The implementation of the TLAC standards into EU law and hence into Cyprus law, is still under discussion.
The international Financial Stability Board’s standards on Total Loss-Absorbing Capacity (TLAC) The only Finnish G-SII, Nordea Bank Oyj will as from 1 January 2020 no longer qualify as a G-SII and will not be subjected to the TLAC standards even if implemented in 2019 as a result of the CRD V/CRR II revision.
The Article L613-30-3 of the French Monetary and financial Code was modified by the Law n° 2016-1691 of 9 december 2016 and enable banks to comply with the Principles on Total Loss-absorbing Capacity (the “TLAC Requirements”) adopted on November 9, 2015 by the Financial Stability Board (the “FSB”).
Even if the TLAC ratio will have to be implemented from 1st January of 2019 and will apply to the globally systemically important banks, France has chosen to establish the ranking of debts in the event of a fi-nancial institution’s liquidation, to create two new categories of debt:
- The first consists of currently existing claims that rank senior, as well as claims of future creditors that are not otherwise preferred and are not in the second category described below; and
- The second consists of a new type of non-structured debt containing a contractual clause specifying that their owner or holder is a “senior creditor” (and thus holds “Senior Non-Preferred Debt”); Senior Non-Preferred Debt may be issued by French banks.
The article thus introduces a new category of debt between subordinated debt, on the one hand, and the debt currently classified as senior debt, on the other hand, permitting financial institutions to issue un-subordinated debt instruments ranking below operating liabilities, making them eligible under the TLAC Requirements.
Banks in Turkey are required to hold gone concern capital in line with the Basel III as per the Regulation on Own Funds. The total capital of a bank is categorized as (i) Tier I Capital comprising of (a) Core Capital (corresponding to Common Equity Tier I capital under Basel III) and (b) Additional Tier I Capital and (ii) Tier II Capital.
Tier II Capital is calculated by the deduction of the deduction items listed under Article 9 of the Regulation on Own Funds from the sum of:
(i) General reserves calculated for the receivables for which the Standardized Approach is used for the determination of the principal credit risk amount as per the CM Regulation (it should, however, be noted that this item will no longer be taken into account as of January 1, 2020);
(ii) The positive amount determined as a result of the calculation set forth in the second paragraph of Article 8 of the Communiqué on Calculation of Credit Risk Weighted Assets based on Internal Ratings-Based Approach; and
(iii) debt instruments and subordinated loans which are approved by the BRSA following an application from the board of directors of the respective bank together with their written statement declaring that the respective debt instruments and issuance premiums thereof or the subordinated loans bear the conditions listed under the Regulation on Own Funds to be considered under Tier II capital.
Note that the conditions listed under the Regulation on Own Funds for the debt instruments or subordinated loans to be categorized as Tier II Capital are in line with the Basel III requirements on the same.
Systemically important banks must issue sufficient qualifying debt instruments to fund restructuring without recourse to public resources (gone concern requirement). Going concern capital (see above at Question 23.) and gone concern capital together form the total loss-absorbing capacity (TLAC). The Swiss going concern and gone concern requirements for systemically important banks operating interna-tionally (G-SIBS) are generally aligned with the FSB’s total loss-absorbing capacity standard.
The gone concern requirement of a G-SIB is equal to its total going concern requirement (see above at Question 12.); D-SIBs are subject to a gone concern requirement of 40 percent of their going concern requirement, subject to a phase-in until 2025. The gone concern requirement should primarily be fulfilled with bail-in debt instruments that are designed to absorb losses after the write-down or conversion into equity of regulatory capital of a G-SIB or D-SIB in a restructuring scenario, but before the write-down or conversion into equity of other senior obligations of the G-SIB or D-SIB, respectively. Bail-in debt in-struments do not feature capital triggers that may lead to a write-down and/or a conversion into equity outside of restructuring, but only begin to bear losses once the G-SIB or D-SIB is formally in restructur-ing proceedings and FINMA orders capital measures (i.e., a write-down and/or a conversion into equity) in the restructuring plan. According to the Capital Adequacy Ordinance, bail-in debt instruments must fulfil certain criteria in order to qualify under the gone concern requirement, including FINMA approval. Specific types of D-SIBs subject to a state guarantee or similar mechanism may also meet half or all, depending on whether certain criteria are met, of their gone concern requirement by way of the state guarantee or similar mechanism.
Credit institutions in the Slovak Republic are required to hold gone concern capital in accordance with respective EU regulations applicable in the Slovak Republic. No specific Slovak legislation applies in this respect and TLAC standards have not been implemented yet.
Currently there is no specific requirement to hold gone concern capital. However, it is fair to assume that the amendments of the CRR that are currently underway will include also rules on the total loss absorbing capacity (TLAC) of banks. In accordance with the recommendations of the Financial Stability Board it can be expected that certain minimum levels for the total loss absorbing capacity will be introduced.
Under the PMB there are certain rules and requirements in connection with the calculation of Tier 2 capital, namely gone-concern capital. Such rules, among others, include guidelines as to which items may be included in Tier 2 capital, how are they to be calculated, which items may be set-off, and so on. It should further be noted that following the implementation of the Basel III Rules, Israeli banks issue less capital notes which form Tier 2 capital. In addition, Israeli banks have recently begun issuing contingent convertible (CoCo) bonds. Such bonds are deemed Tier 1 capital for regulatory purposes, due to the fact that their terms enable a compulsory conversion to equity in certain circumstances or the termination of the interest obligations and the deferral of the principal repayment.
Yes. The requirements on total loss absorbing capacity have been implemented within MAS Notice 637.
A TLAC requirement is expected to be implemented in accordance with the TLAC standard issued by the FSB. The standard requires a G-SIB to hold TLAC in an amount of not less than 16% of its risk-weighted assets and 6% of the leverage ratio denominator by 2019, and not less than 18% of its risk-weighted assets and 6.75% of the leverage ratio denominator by 2022.
The FSA released the draft TLAC rule to the public for comment in December 2018 and plans to implement the TLAC rule in March 2019. Furthermore, the TLAC ratios for 2022 will be applicable in Japan from March 2022.
The CBO has issued instructions for implementing capital adequacy and liquidity coverage for conven-tional banks based on the Basel III guidelines issued by the BCBS. The regulatory capital, T1 Capital CET1 and AT1 is as set out in Question 12, as are the minimum capital requirements for Omani banks. The capital buffers have been outlined in addition to the minimum capital requirements, which could be used at the time of stress and a breach in capital buffers will lead to constraints on distributions but not on the operations of the bank. The capital buffers have to be met solely from CET 1. The capital buff-ers include a capital conservation buffer equal to 2.5% of Risk Weighted Assets (RWA), a countercycli-cal capital buffer of 0 per cent. to 2.5 per cent. of RWAs.
Liechtenstein has transposed the CRD IV/CRR framework as well as the BRRD, which reflect the TLAC standard, into national law.
No, the total loss absorbing capacity (the "TLAC") is one of the Basel III solutions that has yet to be adopted by the European legislation in the course of the revision of the CRR Regulation. As a consequence, this is not yet applicable in Luxembourg.
Portugal adopted Total Loss Absorbing Capacity (TLAC) as well as Minimum Requirement for own funds Eligible Liabilities (MREL) – the latter does not apply only to G-SIIs – in order to prevent or mitigate long-term non-cyclical systemic or macroprudential risks.
No, although it is worth noting that there are no globally systemic important banks in Malta. This notwithstanding, under the Recovery and Resolution Regulations, institutions in Malta are required to meet at all times at all times a minimum requirement for own funds and eligible liabilities (“MREL”).
Paragraph 21 under the QCB Implementation Instructions – Basel III Framework for Conventional Banks provides that total regulatory capital will consist of the sum of the following elements:
I. Tier 1 (“T1”) Capital: going-concern capital
(a) Common Equity Tier 1 (“CET1”)
(b) Additional Tier 1 (“AT1”)
II. Tier 2 (“T2”) Capital: gone-concern capital
For each of the three categories above, there is a defined set of criteria that instruments are required to meet before inclusion in the relevant category.
For instance, Paragraph 43 of the aforementioned instructions provides that the objective of Tier 2 (“T2“) is to provide loss absorption on a gone-concern basis. Based on this objective, a table is provided within this Paragraph 43 which sets out the minimum set of criteria for an instrument to meet or exceed in order for it to be included in T2 capital.
There is no requirement for TLAC as there aren’t globally systemic important institutions in the Romanian market. However, banks are required to meet the MREL ratio. Regulation (EU) 2016/1450 includes the criteria that the eligible liabilities considered for the calculation of MREL must comply.
MREL is the correspondent BRRD measure for the Total Loss Absorbing Capacity (TLAC) proposed by the Financial Stability Board (FSB) for Globally Systemically Important Banks (G-SIBs)
There is no requirement for banks to hold gone concern capital.
The UK is currently subject to the EU's TLAC rules in the CRR II Regulation which have applied from 1 January 2019 in relation to globally systemically important banks.
The FRB issued a Final Rule in 2017 that requires top-tier US bank holding companies identified by the FRB as US global systemically important banking organizations (G-SIBs) and US intermediate holding companies of foreign G-SIBs with at least $50 billion in consolidated US non-branch or agency assets to maintain minimum ratios of TLAC (generally consisting of Tier 1 capital and eligible long-term debt) and separate eligible long-term debt (among other requirements) by January 1, 2019. TLAC is required to be held by such entities and be available to absorb losses and free resources for key financial subsidiaries in the consolidated organization.
Currently there is no specific requirement to hold gone concern capital. However, considering that the amendments of the CRR that are currently underway will include also rules on the TLAC of banks, it can be expected that certain minimum levels for the total loss absorbing capacity will be introduced.
No. According to Basel III, BoT provides the gone concern basis in the criteria for calculation of financial instrument to be Tier 1 and for Tier 2 as per recent notification issued in 2015. In order to qualify under Basel III, any instrument must be mandatorily converted into shares or written off when the bank reaches the point of non-viability- this is a gone concern requirement.
The standards on the total loss-absorbing capacity (“TLAC”) of global systemically important institutions (G-SIBs) are currently not yet implemented by the European Commission. Proposal on the amendment of the Directive 2014/59/EU, which will implement the TLAC standard, is currently still in the EU ordinary legislative procedure.
In regards to the gone concern capital, pursuant to Basel III Slovenian banks are required to hold gone concern capital, i.e. Tier 2 capital in accordance with and as set out in the CRR.