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Biggest banks must have TLAC for key local operations, FSB says

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Biggest banks must have TLAC for key local operations, FSB says

Global systemically important banks will have to ensure they have enough local debt to bail out key operations around the world even if they are not organized into separate subsidiaries, under proposed guidelines released by the Financial Stability Board on Dec. 16.

So-called G-SIBs will also have to ensure they use a minimum amount of debt, as opposed to equity, to meet requirements for total loss-absorbing capacity, or TLAC, in their international operations in order to ensure that their operations can be run down smoothly in the case that they are no longer viable, the FSB said in a consultative document.

The document spells out rules for the use of "internal TLAC," which must be provided for a bank's subsidiaries when they can be wound down without affecting the parent company, and sets out guidelines for the relationship between authorities hosting a G-SIB subsidiary and those of its parent company.

The introduction of TLAC, which is a buffer of debt and capital that can be converted into equity or written off if the world's most financially important banks run into trouble, is a key part of the post-crisis global reforms designed to ensure governments do not have to bear the cost of bank bailouts and aimed at ending the problem of lenders that become too big to fail.

G-SIBs will be required by 2019 to hold at least 16% of their risk-weighted assets in TLAC instruments, which in addition to debt includes most common equity Tier 1 capital. The threshold rises to 18% from 2022, although Chinese banks only have to meet the 16% TLAC requirement by 2025.

In addition to distributing internal TLAC between subsidiaries, banks will also have to ensure that different units of those subsidiaries that perform key functions are allocated at least 75% to 90% of the TLAC requirement, the FSB said. These material sub-groups must be located either in a single jurisdiction or in different jurisdictions that share rules on winding down banks or else cooperate very closely.

Host authorities should also insist that enough internal TLAC is comprised of debt to avoid the danger that over-reliance on equity means the parent company might be unable to pay interest on external TLAC liabilities, the FSB said.

Internal TLAC can also be made up of collateralized guarantees, following agreement between host authorities and those of the parent company's home jurisdiction.

The FSB also recommends that contractual clauses for write-down or conversion into equity be included in internal TLAC instruments even when local authorities have the power to trigger conversion themselves. Home and host authorities should also coordinate to ensure that writing down internal TLAC does not cause any change of control of a bank's business unit or legal challenges that might hamper the overall resolution strategy.

In a separate consultative document, the FSB also said G-SIBs should be obliged to prepare contingency plans showing how they would maintain access to financial markets while they were being wound down in a financial emergency.

Banks have until Feb. 10, 2017, to make comments on the documents.