Material Repercussions and Disruptions for U.S. Banks and Investors:
Capital Deductions for Investment in GSIB BHC Senior Debt
Disruption to the BHC LTD Market from TLAC LTD Issuance
Impact of Capital Buffers on GSIB Market Making Activities
Greater Use of LTD in BHC Capital Structures
By: Thomas W. Killian, Principal at Sandler O’Neill
(212) 466-7709 or firstname.lastname@example.org
Following the initial TLAC disclosure by the Financial Stability Board (FSB) on November 10, 2014, the Board of Governors of the Federal Reserve System (Board) announced on October 30, 2015 a Notice of Proposed Rulemaking (NPR) for TLAC rules, with comments due by February 1, 2016. TLAC is designed to provide additional loss absorbing capacity for Global Systemically Important Banks (GSIBs) to avoid the need for a government bail-out in the event of insolvency of a bank that is deemed to be “too big to fail.”
Using the Single Point of Entry (SPOE) or Multiple Points of Entry (MPOE) resolution framework, which assumes that the GSIB bank holding company (BHC) will remain in place during the resolution of the underlying bank, the GSIB BHC must maintain enough “bail-in” capital in the form of liabilities to absorb losses when continued operations of the bank are no longer viable. On December 3, 2015, S&P downgraded by one notch the BHC long-term debt ratings for all eight U.S.-based GSIBs highlighting the impact of the TLAC requirements and the explicit removal of government support previously factored into GSIB BHC credit ratings.
Overall, we think that the TLAC rules represent the most substantial change in regulatory capital requirements since Basel III was implemented in October 2013 and will have a significant impact on BHC capital structure, lines of business, and financial returns.