Investment Banking

Bank Regulators Meet on ‘Too-Big-to-Fail’ Rule

“Total loss absorbency capacity” will require lenders to have capital and debt equivalent to at least 16% to 20% of their risk-weighted assets.
Matthew HellerSeptember 25, 2015
Bank Regulators Meet on ‘Too-Big-to-Fail’ Rule

Global banking regulators met in London on Friday to finish work on a common international standard for preventing taxpayer bailouts of large banks.

Avoiding “too big to fail” bailouts has been a major concern of regulators since the global financial meltdown. In November, the Financial Stability Board unveiled its blueprint for a “total loss absorbency capacity” (TLAC) rule that requires lenders to have capital and debt equivalent to at least 16% to 20% of their risk-weighted assets available to take losses.

As board members gathered in London, Bloomberg reported that nations such as the United States and Germany are pushing for the toughest possible rules, while Japan, France, and others prefer a softer line.

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If the TLAC requirement is set at the high end, analysts say, many lenders — especially those most dependent on deposits for funding — could be forced to issue billions of dollars of new debt. A compromise has been proposed to phase in the new requirement so that banks would hold TLAC of 16% from 2019, rising to 20% by 2022 or later.

“The point is that there will be a transition period,” Steve Hussey, an analyst at AllianceBernstein in London, told Bloomberg. “Yes, if you tell them to do it right now, you get some enormous numbers. But most banks are already close to 16 percent and, while there are clearly going to be some with a lot of issuance to do, the transitional period should make it fairly straightforward.”

Assuming a TLAC requirement of 20%, JPMorgan Chase and Wells Fargo will have to issue the most securities to reach the goal — about $85 billion and $65 billion, respectively, according to Paul Smillie, a Singapore-based credit analyst at ColumbiaThreadneedle.

The FSB has published a list of 30 banks it regards as “systemically important,” meaning their collapse could have a wider impact on global financial systems.