Is there a requirement for banks to hold gone concern capital (TLAC)?
Banking & Finance
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.
Credits institutions are required to hold gone concern capital, i.e. Tier 2 capital in accordance with and as set out in the CRR. Therefore, no specific Hungarian legislation applies in this respect. TLAC-standards have not been implemented yet.
Yes, pursuant to the CRR, there is a requirement for banks to hold gone concern capital.
Lithuania has implemented requirements set in CRR directive No. 36/2013. Tier 2 capital is considered to be gone concern capital. The gone concern capital allows an institution to repay depositors and senior creditors if a bank became insolvent.
Yes, there is a minimum requirement for own funds and eligible liabilities, called MREL, but it is set by the Bank Guarantee Fund in a resolution plan prepared for each bank individually.
There are no additional capital requirements from the national authorities in regards to the Total Loss-Absorbing Capacity (TLAC) requirements.
TLAC requirements have been a part of the regulatory capital norms for banks since the Basel III norms were implemented in 2013. Gone concern capital is typically included in the Tier 2 capital requirements which, should generally be at least 2% of RWA. The RBI has issued guidelines to categorize capital that can be recognised as bank’s Tier 2 capital. However, in the Indian policy discourse, the term “TLAC” is usually associated with special subordinated capital requirements for systematically important banks. There are no additional TLAC requirements for Indian banks outside of the usual bank capitalization guidelines, including for those banks that are identified as D-SIBs.
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.
Although the FSA has yet to publish the TLAC rule, they published an outline of the TLAC framework in Japan in April 2016. In the outline, the FSA deems the Single Point of Entry (SPE) resolution, in which resolution powers are applied to the top-level entity of a banking group by a single national resolution authority, as a preferable resolution of G-SIBs in Japan. To implement this SPE resolution strategy effectively, the FSA plans to require bank holding companies designated as G-SIBs to (i) meet the minimum external TLAC requirements provided under the FSB’s TLAC standard, and (ii) cause their material subsidiaries designated as systemically important by the FSA to maintain a certain level of capital and debt recognised by the FSA as having internal TLAC.
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”).
Banks are required to observe the Standards on Total Loss-Absorbing Capacity (TLAC) requirements, as this has been implemented in Nigeria under the CBN Guidance Notes on Supervisory Review Process. The Guidance Notes provides for Internal Capacity Adequacy Assessment Process and the adoption of the principle of proportionality in the determination of internal capital (the total amount of capital needed to cover losses exceeding a given expected level).
Currently there is no such requirement. However, it is expected that such requirements will form part of the measures implementing BRRD. The current white paper from the Norwegian government contains rules corresponding to BRRD's minimum requirement for eligible liabilities. The BRRD's minimum requirement for eligible liabilities was introduced to align the BRRD's requirements with the international TLAC (Total Loss Absorbing Capital) recommendations, which was prepared by the Basel Committee together with the Financial Stability Board.
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.
Recently Qatar Central Bank (QCB) has come out with instructions for implementing capital adequacy and liquidity coverage for conventional banks based on the Basel III guidelines issued by the Basel Committee on Banking Supervision (BCBS). The regulatory capital will consist of the sum of Tier 1 (“T1”) Capital: going-concern capital and Tier 2 (“T2”) Capital: gone-concern capital.
The Tier 1(“T1”) Capital: going–concern capital will consist of Common Equity Tier 1 capital (“CET 1”) and Additional Tier 1 (“AT1”). The minimum capital requirements for Qatari banks are: a) CET1 must be at least 6.0% of risk weighted assets at all times, b) T1 Capital must be at least 8.0% of risk weighted assets at all times and c) Total Capital (T1 Capital plus T2 Capital) must be at least 10.0% of risk weighted assets at all times.
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 buffers include Capital conservation Buffer — 2.5% of Risk Weighted Assets (RWA), Countercyclical Buffer — 0% to 2.5% of RWAs and Domestic Systemically Important Banks (DSIBs) Buffer — 0% to 3.5% of RWAs.
Systemically important banks operating internationally (G-SIBS) must issue sufficient qualifying debt instruments to fund restructuring without recourse to public resources (gone concern requirement). Going concern capital (see above at Question 21.) and gone concern capital together form the total loss-absorbing capacity (TLAC). The Swiss going concern and gone concern requirements 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 10.). 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 in a restructuring scenario, but before the write-down or conversion into equity of other senior obligations of the G-SIB. Bail-in debt instruments 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 is formally in restructuring 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.
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:
- 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 CA Regulation;
- 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
- 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.
The European Commission proposed new standards on the total loss-absorbing capacity (TLAC) of global systemically important institutions (G-SIIs), which are not implemented yet. All EU Global Systemically Important Banks (G-SIIs) shall meet the target (>16% of RWA / 6% of the LREM as of 2019 and >18% RWA / 6.75% LREM as of 2022).
There are no global systemically important banks (G-SIBs) operating in Bulgaria, so TLAC requirements are not directly applicable currently. The RRCIIFA transposes the Minimum Requirements on Eligible Liabilities (MREL) as provided in Directive 2014/59/EC. Under the MREL requirements of Bulgarian law, BNB fixes the minimum own capital and eligible liabilities for each bank licensed in Bulgaria.
Though TLAC and MREL differ in scope and parameters, both aim at ensuring that banks in resolution have sufficient resources to cover losses and recapitalization needs. Following the proposal of the European Commission for introduction of TLAC requirements at EU level, it is to be expected that such requirements will be implemented on national level in the future, too.
The entities of the National Financial System must keep a relation of 9% between the Technical Equity and the weighted sum for risk of its assets and contingents. The Technical Equity is composed by: the sum of the paid-in and the subscribed capital; the reserves, the earnings after the profits sharing and the Income Tax; the legal reserve fund, the accumulated earnings of previous years; contributions for future capitalization and debentures.
TLAC (total loss-absorbing capacity) applies to G-SIBs (global systemically important banks). TLAC requirements take effect from 1 January 2019 for investments in most G-SIBs, but later for those whose headquarters are in emerging market economies. TLAC requirements are set by the Financial Stability Board.
MREL (minimum requirement for own funds and eligible liabilities) will be set for credit institutions by the CBI on a case by case basis, and will depend on factors such as size, systemic risk and the identified resolution strategy for that credit institution. MREL setting has yet to occur.
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.
Not yet, however, the minimum standard for TLAC has been agreed upon at the G20 summit in Turkey in accordance with the Basel Committee and the Financial Stability Board. It is now up to the European Commission to implement the TLAC term sheet for the Globally systemically important banks, most likely through a new ‘CRD V’ package.
A credit institution has to meet at all times a requirement for a minimum level of own funds and eligible liabilities. The minimum requirement expresses the required percentage of the amount of own funds and eligible liabilities of the credit institution of the amount of the total liabilities and own funds of the credit institution. Total liabilities shall also include derivative liabilities that are fully covered by counterparty netting rights.
Not yet. However, legislative initiatives are currently in progress at EU level in respect of the amendment of the own funds and eligible liabilities ('MREL') framework, so as to bring the latter in line with the Total Loss-Absorbing Capacity ('TLAC') requirement. As a member-state of the EU, Greece will be expected to transpose the relevant provisions in its national legal order, following their enactment.
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 assumed that from 2019 certain minimum levels for the total loss absorbing capacity will be introduced.
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 organisations (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.
In accordance with question 10 above, the minimum of total solvency ratio a bank is required to hold is 9%, while Basel III standards require 8%.
The international Financial Stability Board’s standards on Total Loss-Absorbing Capacity (TLAC) instruments have not yet been implemented into Finnish law. Implementation is expected by early 2019.
The UK currently expects to be subject to the EU's TLAC rules. Currently the provisions in the CRR II Regulation relating to TLAC are expected to apply from 1 January 2019.