Italy’s practical approach to TLAC

Author: IFLR Correspondent | Published: 5 Nov 2015

The Financial Stability Board’s (FSB) consultation paper on total loss-absorbing capacity (TLAC) for global systemically important banks (G-Sibs) creates important issues for European banks, which are already subject to the framework adopted via the European directive on the recovery and resolution of credit institutions (BRRD). The consultation paper sets out, among other things, criteria for the types of capital instruments eligible to fulfil the minimum TLAC requirement. Among these is a requirement for eligible liabilities to be subordinate to 'operating liabilities’ of the bank in question.

To this end, the FSB recognises three forms of subordination: structural subordination (achieved when liabilities are issued by a non-operating holding company); contractual subordination (tier 2 instruments); and statutory subordination.

Structural subordination works well for US, Swiss and UK institutions, which already have a non-operating holding company (holdco) structure in place. They can issue senior unsecured debt out of that entity to meet...