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Resolution of global systemically important banks (G-SIBs)

Resolution of global systemically important banks

The Financial Stability Board (FSB) has published two consultation papers relating to resolution – on internal total loss absorbing capacity (TLAC) and on firms’ access in resolution to financial market infrastructure (FMI).

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The paper on TLAC proposes a set of guiding principles to support the implementation of the Internal TLAC requirement for a G-SIB, under which some loss-absorbing resources should be committed in advance to subsidiaries or sub-groups located in host jurisdictions and deemed material for the resolution of the G-SIB as a whole. This covers:

  • The process for identifying material sub-groups, including the role of a host authority in identifying and proposing material sub-groups (or individual entities) within their jurisdiction. The possibility of multi-jurisdictional material sub-groups may be helpful within the European Single Resolution Mechanism;
  • Determining the size and composition of the internal TLAC requirement. A host authority can request that a material sub-group holds internal TLAC (provided by a parent of holding company) equivalent to between 75-90 percent of what it would have been required to hold as a stand-alone resolution entity. At least 33 percent of the internal TLAC must be in the form of debt liabilities. Alternatively, home and host authorities could agree to credible collateralised guarantees that would be feasible at the point of non-viability;
  • The ability of a host authority to trigger the bail-in (writing down or converting debt to equity) of Internal TLAC for a material sub-group at a point of non-viability. The sub-group is not put into formal resolution. And it may not be necessary for the parent resolution entity to be put into resolution if the resolution entity can afford to provide this support without itself having to be put into resolution (for example in the case of a large resolution entity supporting a relatively small subsidiary);
  • Cooperation and coordination between G-SIB home and host authorities. For example, when the host authority determines that the material sub-group has reached the point of non-viability it must give the home authority 48 hours’ notice before triggering the conversion of the Internal TLAC. But because the FSB has no basis on which to go any further, it is noticeable that host and home authorities have the ability to disagree and to “go their own ways” if agreement cannot be reached.

In Europe, much of this has already been included in the proposed CRR 2 and BRRD 2 revisions, and there is a much stronger legislative basis for home and host authority cooperation - in general, the home authority prevails, with the additional possibility of the EBA providing binding mediation.

The FSB consultation paper on continued access to FMI sets out arrangements to support the continuity of access to FMIs for a firm in resolution.

These arrangements apply to the providers of FMI services, FMI participants and the relevant FMI resolution and supervisory authorities.

Users of FMI services need to focus on recovery and resolution plans on their ability to continue to be able to use FMI services, including for example having the liquidity available and meeting all other conditions to preserve access to FMIs.

Meanwhile, FMIs should ensure that users that are put into resolution are not automatically excluded from being able to access FMIs, while supervisors and resolution authorities should ensure that FMIs themselves are subject to adequate recovery and resolution planning.

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