By John M. Pachkowski
Recent action by the Federal Reserve Board and the Financial Stability Board to cushion any blows to the global financial system from the failure of a global systemically important bank or G-SIB could require those banks to raise up to $1.2 trillion in new capital.
Fed TLAC proposal. At its Oct. 30, 2015, open meeting, the Fed released a proposed rule that require eight domestic G-SIBs to establish an external long-term debt requirement—external LTD requirement, an external total loss-absorbing capacity requirement—external TLAC requirement, and a related external TLAC buffer. The eight G-SIBs that would be affected by the proposed rule are: Citigroup Inc., JP Morgan Chase & Co., Bank of America Corporation, The Bank of New York Mellon Corporation, Goldman Sachs Group, Inc., Morgan Stanley, State Street Corporation, and Wells Fargo & Company.
To meet the external TLAC requirement, covered BHCs would be required to maintain outstanding eligible external TLAC equal to the greater of: 18 percent of risk-weighted assets (RWAs) and 9.5 percent of total leverage exposure.
The external LTD requirement would be met if a covered BHC maintains outstanding eligible external LTD equal to the greater of: 6 percent of RWAs, plus the applicable GSIB capital surcharge, and 4.5 percent of total leverage exposure.
Finally, the external TLAC buffer would equal the sum of 2.5 percent, any applicable countercyclical capital buffer, and the GSIB surcharge applicable under method 1 of the Fed’s GSIB surcharge rule.
FSB TLAC Principles. On Nov. 9, 2015, the FSB finalized its TLAC standards that were first proposed in November 2014. The TLAC Principles and Term Sheet define a minimum requirement for the instruments and liabilities that should be readily available for bail-in within resolution at G-SIBs but do not limit authorities’ powers under the applicable resolution law to expose other liabilities to loss through bail-in or the application of other resolution tools.
The final TLAC Principles also will require G-SIBs to meet a minimum TLAC requirement of at least 16 percent of the resolution group’s risk-weighted assets—TLAC RWA Minimum—beginning on Jan. 1, 2019, and at least 18 percent beginning on Jan. 1, 2022. In addition, G-SIBs will be required to ensure that the Minimum TLAC will be at least 6 percent of the Basel III leverage ratio denominator—TLAC Leverage Ratio Exposure (LRE) Minimum—beginning on Jan. 1, 2019. The LRE Minimum TLAC is increased to 6.75 percent beginning on Jan. 1, 2022.
G-SIBs headquartered in emerging market economies will be required to meet the 16 percent RWA and 6 percent LRE Minimum TLAC requirement no later than Jan. 1, 2025, and the 18 percent RWA and 6.75 percent LRE Minimum TLAC requirement no later than Jan. 1, 2028. The FSB noted that this conformance period will be accelerated if, in the next five years, corporate debt markets in these economies reach 55 percent of the emerging market economy’s GDP. The FSB will monitor implementation of the TLAC standard and will undertake a review of the technical implementation by the end of 2019.
Impact on banks. Regarding the Fed proposal, an agency staff memorandum noted that six of the eight covered BHCs would currently have external TLAC shortfalls. The memorandum added that the aggregate external TLAC shortfall of the covered BHCs would be approximately $102 billion, the aggregate external LTD shortfall would be approximately $90 billion, and the aggregate shortfall for the external LTD and TLAC requirements together would be approximately $120 billion. The Fed staff estimated that the aggregate increased funding cost for the covered BHCs would range from approximately $680 million to $1.5 billion annually.
To quantify the costs of the FSB’s TLAC requirements, the Basel Committee on Banking Supervision, FSB, and Bank for International Settlements conducted a number of impact assessment studies.
Overall, the impact assessment studies found that the microeconomic and macroeconomic costs of TLAC are relatively contained. The estimated costs for G-SIBs of meeting the minimum TLAC requirement are found to translate into increases in lending rates for the average borrower that range from 2.2 to 3.2 basis points, while the median long-run annual output costs are estimated at 2 to 2.8 basis points of gross domestic product. The impact assessment studies also noted that the benefits of TLAC arise from the reduced likelihood and cost of crises and exceed these costs, with even the most conservative assumptions yielding estimated benefits of between 15 and 20 basis points of annual GDP.
An Analyst Blog from Zacks Investment Research noted that Wells Fargo & Company would need to issue around $40 to $60 billion in debt. This assessment was based on an announcement was made by Chief Financial Officer John Shrewsberry at a Nov. 6, 2015, investor conference.
Stephen Gandel, a senior editor at Fortune.com, noted banks will need to raise that $1.2 trillion in TLAC-eligible instruments. This figure is based on the report entitled Assessing the economic costs and benefits of TLAC implementation which put the average annual microeconomic costs to the G-SIBs ranging from between €400 to €950 million.
Writing for Reuters, Michelle Price and Lawrence White reported that China’s four biggest banks may have to raise up to $400 billion to meet the FSB’s TLAC requirements. Their report noted that James Antos, an analyst at Mizuho Securities in Hong Kong, said China’s banks would suffer the “greatest burden” in meeting the requirements because they currently held minimal senior debt.
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