The “too-big-to-fail” (TBTF) problem arises when the failure of a systemically important financial institution leaves public authorities with no option but to bail it out using public funds to avoid financial instability and economic damage. The knowledge that this can happen encourages those institutions to take excessive risks.
In this regard, at the St. Petersburg Summit in 2013 the G20 Leaders called on the FSB to assess and develop proposals by end-2014 on the adequacy of the loss absorbing capacity of those entities when they fail.
To this end, on November 2014 the FSB published, in consultation with the BCBS, a consultative document on the total loss-absorbing capacity (TLAC) of global systemically important banks (G-SIBs) in resolution.
After the consultation period, the FSB published the final standard on TLAC for G-SIBs on November 2015, including high level principles and a detailed Term Sheet.
The technical note prepared by Management Solutions’ R&D department analyses the Term Sheet published by the FSB and the major implications for financial institutions arising from its implementation.
The TLAC consists of instruments that an institution must hold and that can be legally, feasibly, effectively and operationally written down or converted into equity in case of resolution, in an amount that exceeds the capital and leverage requirements.
Scope of application:
There are two types of TLAC requirements: an External TLAC requirement, which applies to resolution entities; and an Internal TLAC requirement, which applies to subsidiaries considered material sub-groups.
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