Final Rule: Total Loss Absorbing Capital (TLAC) Holdings

Summary:

The federal bank regulatory agencies have issued a joint final rule that amends the capital rule to require advanced approaches banking organizations to deduct from regulatory capital certain investments in unsecured debt instruments issued by global systemically important banks (GSIBs) and certain subsidiaries of GSIBs that are issued for the purpose of meeting minimum long-term debt or TLAC requirements (i.e., covered debt instruments).

A copy of the final rule can be found on the FDIC’s website.

Statement of Applicability to Institutions with Total Assets Under $1 Billion: This Financial Institution Letter (FIL) is only applicable to advanced approaches banking organizations.

Highlights:

• The final rule amends the capital rule to require generally that an advanced approaches banking organization treat a direct, indirect, or synthetic investment in a covered debt instrument as if it were an investment in a tier 2 capital instrument, and therefore, subject the investment to the existing deduction approaches under the capital rule.
• The final rule generally requires advanced approaches banking organizations to include investments in covered debt instruments in the calculation of non-significant investments in the capital of unconsolidated financial institutions.
• The final rule provides that an advanced approaches banking organization that is also a U.S. GSIB or a U.S. GSIB subsidiary may exclude from a capital deduction the aggregate amount of investments in covered debt instruments that do not exceed 5 percent of the institution’s common equity tier 1 (CET1) capital. To qualify for this exclusion, the covered debt instruments must be direct or indirect exposures held for 30 business days or less or synthetic exposures (with no holding limit) that are held in connection with market making-related activities, identified using criteria from the Volcker Rule. Covered debt instruments included in this 5 percent exclusion are measured on a gross long basis and any necessary deductions for instruments identified for this 5 percent exclusion are made on a gross long basis.
• The final rule provides an advanced approaches banking organization that is not a U.S. GSIB with a similar 5 percent CET1 exclusion for market making activities; however, the 30-business-day holding limit does not apply.
• The final rule provides capital treatment that is consistent with the proposed rule and the Basel Committee’s international standard for TLAC holdings.
• The final rule is effective on April 1, 2021.

Distribution:

FDIC-Supervised Institutions

Suggested Routing:

Chief Executive Officer
Chief Financial Officer
Chief Risk Officer