Moody’s says on 2 April, the US Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency proposed a rule that would require US global systemically important bank (GSIB) holding companies and advanced-approaches banking organizations1 to hold additional capital against investments in total loss absorbing capacity (TLAC) debt. The additional capital required for investments in TLAC debt would reduce interconnectedness between large banking organizations and the systemic effect of a GSIB’s failure, a credit positive for the US banking system.
The credit-positive proposal would require companies to deduct from their regulatory capital any investment in their own regulatory capital instrument which includes TLAC debt, any investment in another financial institution’s regulatory capital instrument, and investments in unconsolidated financial institutions’ capital instruments that would qualify as regulatory capital if issued by the banking organization itself (subject to a certain threshold). The deductions intend to discourage banks from investing in the regulatory capital instruments of another bank and improve the largest banks’ resiliency to stress and ensure a more efficient bank resolution process.
The proposal also includes additional required disclosures about TLAC debt in bank holding companies’ public regulatory filings, which would increase transparency.
The TLAC rules were first proposed in 2015 and finalized in December of 2016. However, in 2016 when the TLAC rules were finalized, regulators needed more time to determine the rule’s regulatory capital treatment for investments in certain debt instruments such as TLAC issued by bank holding companies.
