The economic crisis has led to a wide range of regulatory responses to protect financial stability and minimize taxpayer exposure. Two of these responses are maintaining a minimum total loss-absorbing capacity (TLAC) and minimum requirements for eligible liabilities (MREL).
The objective of TLAC for G-SIBs is to maintain economic functions in the event of resolution without threatening financial market stability or seeking tax payer support. The Financial Stability Board (FSB) has developed a set of principles as well as a term sheet that implements these principles. The MREL requirement is part of the EU Bank Recovery and Resolution Directive and is complementary to TLAC. The main difference is that TLAC only applies to G-SIBs, while MREL applies to all banks in the EU.
TLAC is a minimum regulatory capital requirement in addition to the existing requirements. It consists of instruments that can be written down or converted into equity in case of resolution and these requirements would be implemented in two steps. As from January 2019, G-SIBs will have to comply with a minimum TLAC of 16% of the resolution group's risk-weighted assets and 6% of the Basel 111 leverage ratio. As from January 2022, these minimum requirements will increase to 18% and 6,75%, respectively. For MREL, banks are required to hold a minimum of 8% of own funds and eligible liabilities. MREL will be phased in from 2016 to 2020. Banks are recommended to review existing liabilities against TLAC and MREL requirements to understand the impact on their business model and funding structure.
Author: Vincent Kroes, associate director Corporate Finance