December 16, 2016 / 6:50 PM / 8 months ago

Fitch: US Final TLAC Rule Largely in Line with Proposal

(The following statement was released by the rating agency) NEW YORK, December 16 (Fitch) The Federal Reserve's final rule on total loss-absorbing capacity (TLAC) for systemically important banks will serve to strengthen large US bank operating companies and is generally in line with the initial proposal made last year, says Fitch Ratings. The TLAC requirement at the bank holding company (BHC) level will enhance the solvency of global systemically important bank (G-SIB) operating subsidiaries during periods of stress. The final rule is largely consistent with Fitch's expectations and, therefore, ratings for US GSIBs are unaffected. Fitch had previously upgraded the eight US G-SIBs' domestic subsidiaries in 2015 with the expectation of the implementation of the TLAC requirement. According to the Fed, four of the eight US G-SIBs already meet the TLAC requirements, but around $70 billion in new capital will be required for the remaining four G-SIBs. Fitch expects that institutions will raise the required additional capital through TLAC-qualifying instruments by the stipulated deadline. The final rule, released yesterday, requires that banks maintain a minimum TLAC that is either the greater of 18% of a BHC's total risk-weighted assets or 7.5% of its total leverage exposure. The final rule also stipulates an external long-term debt (LTD) requirement as part of TLAC, which must be the greater of 6% plus a G-SIB surcharge of total risk-weighted assets or 4.5% of total leverage. The requirements come into effect on Jan. 1, 2019, a year earlier than initially proposed, and failure to adhere would result in restrictions on capital distributions and discretionary bonus payments to employees. TLAC is part of a global effort to strengthen G-SIBS' regulatory capital and to ensure orderly resolution, especially during periods of financial market stress. To that end, the requirement to maintain a minimum TLAC at BHCs is positive for the credit of US G-SIB operating companies/domestic subsidiaries. Internal TLAC was not proposed for domestic subsidiaries. These include Bank of America, the Bank of New York Mellon, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley, State Street and Wells Fargo. There are some changes from the initial proposal with the Fed relaxing some of the terms with the final rule. Notably, some existing debt that does not satisfy certain requirements for external LTD will be allowed initially as part of a grandfathering process. In addition, the minimum TLAC relative to total leverage exposure was dropped to 7.5% from an initially proposed 9.5%. Subsidiary debt will not count as TLAC and certain Tier-2 debt will also not be allowed. A part of the initial proposal that would have required a G-SIB to deduct its investments in another bank's unsecured debt from regulatory capital has not been included in the final rules. According to the Fed, a decision on this has been deferred to coordinate with other federal regulators. Some of the initially proposed terms were also relaxed for the requirement to issue internal TLAC and LTD for intermediate holding companies (IHCs) of G-SIB foreign banking organizations. The Fed altered the proposal for IHCs to have an option to issue externally to third parties or to a wholly owned foreign affiliate as opposed to issuing only to its foreign parent. Other key terms of the final rule such as "clean holding company" limitations for BHCs and focusing on single point of entry resolution strategies remain as per the initial proposal. The clean holding company requirement will restrict a BHC from liabilities that could affect an orderly resolution. A multiple point of entry resolution is allowed under the final rule. Contact: Christopher Wolfe Managing Director, Financial Institutions +1 212 908 0771 Fitch Ratings 33 Whitehall Street New York, NY Joo-Yung Lee Managing Director, Financial Institutions +1 212 908-0560 Justin Patrie Fitch Wire +1 646 582-4964 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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