The Financial Stability Board plans to retain a ban on structured notes in new rules intended to keep taxpayers off the hook when the world’s biggest banks fail, disregarding industry opposition.
An Aug. 24 FSB document on the total loss-absorbing capacity, or TLAC, standards cites a “strong consensus” among regulators to exclude structured notes from the list of eligible liabilities. In a June 4 working paper, the FSB had said admitting the notes was an “option under exploration.”
The FSB, led by Bank of England Governor Mark Carney, also proposed phasing in TLAC, according to the document seen by Bloomberg. Banks would be required to issue ordinary shares, subordinated debt and other potentially loss-absorbing securities equivalent to 16 percent to 18 percent of risk-weighted assets by 2019, rising as high as 20 percent at a later, unspecified date.
TLAC is designed to ensure that the world’s 30 most systemically important banks can be stabilized and shut down in an orderly way, without public bailouts. Attempting to impair structured notes, complex securities with embedded derivatives that lenders use to raise funding, would potentially hinder the swift resolution of a bank in difficulties and risk prompting legal challenges to regulators’ actions.
The exclusion means that “TLAC-eligible liabilities generally need to be junior to structured notes,” the FSB document states. The ban was included in the regulator’s initial proposal last November.
The British Bankers’ Association told the FSB in February that the securities are “a materially important liability class in the funding structures” of many banks, according to a letter seen by Bloomberg.
The FSB, which brings together regulators and central bankers from the Group of 20 nations, plans to deliver the final TLAC rules for endorsement by G-20 leaders in November.
TLAC sets a minimum amount of debt and other securities that are sufficiently subordinated to be written down or converted to stock to recapitalize a failing lender, allowing it to continue as a going concern or to be closed down without damaging a nation’s financial system.
In addition to the requirement calculated as a percentage of risk-weighted assets, the TLAC draft also sets a minimum of “at least 6 percent of the Basel III leverage ratio denominator” to be maintained at all times. This will be subject to review, possibly in 2019, taking into account any changes to the ratio made by the Basel Committee on Banking Supervision, according to the document.
“This requirement does not limit authorities’ powers to set a requirement above the common minimum or put in place buffers in addition to the TLAC LRE Minimum,” it states.
FSB Steering Committee members “expressed differing views on the calibration” of the TLAC minimum standard, according to the document. The two-stage phase-in approach is a response to this divergence of opinion.
The regulator also proposed an “implementation review” by end-2019 or later. The review will take into account Basel committee action on the leverage ratio, the “impact on resolvability” of TLAC eligibility rules, “the extent to which the subordination exemptions remain justified” and the calibration of so-called internal TLAC, which is intended to ensure that a global bank’s key subsidiaries can be stabilized and shut down in an orderly way.
The exemption from TLAC regulations granted to Bank of China Ltd., Agricultural Bank of China Ltd. and Industrial & Commercial Bank of China Ltd., the only emerging-market institutions in the FSB’s list of global, systemically important lenders, will probably be removed, though no date has been set, according to the document.