Fed’s final TLAC rule released

Author: Edward Price | Published: 16 Dec 2016
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The US Federal Reserve’s final total loss absorbing capacity (TLAC) rule has been welcomed by the industry. Speaking at a press briefing on December 15, Greg Baer, president of The Clearing House Association, said it was “the culmination of a legal and balance sheet revolution that has effectively ended too-big-to-fail”.

Spanning politics, banking economics and the law, the resolvability or otherwise of the largest US banks has always been a difficult post-crisis theme. The key issue? Whether US taxpayers will ever again face the bank bail-outs that inflamed American politics during and after the global financial crisis. As a result of that inflammation, debates on how to tackle the too big to fail issue have raged for years. Senator Bernie Sanders has made a second career of bemoaning Wall Street, and some fairly prominent US officials have even gone so far as to call for US banks to be broken up in articles, in the press and on TV.

Populism aside, TLAC is in fact a key part of the solution to the too-big-to-fail problem. In a nutshell, it is the requirement for global systemically important banks (G-Sibs) to hold long-term debt which can be converted to equity during resolution. That ability boosts banks’ loss absorbing capacity, and the industry’s response to the Fed’s final rule has been positive.

Long road

A key chapter in Banking 101 is that banks are prone to intrinsic instabilities, the most obvious of which is bank runs. But another chapter fleshes out why the sheer power of banks’ economies of scale is essential to the overall volume of credit provided in economies. Regulators have thus regarded the real post-crisis issue as not how to break the big banks up, but instead how to ensure they continue to take large-scale private risks without making claims on public money if they fail.

"The TLAC requirement has effectively ended too big to fail"

Step in TLAC. As well as its loss-absorbing requirements, it also imposes new structural and legal requirements that, together, should eliminate the risk of a future taxpayer bailout. The final rule will apply to both US G-Sibs and to the operations of foreign G-Sibs in the US.

"While equity is far and away the best form of capital to ensure the resilience of a firm, the whole point of resolution planning is to prepare for the eventuality, no matter how unlikely, that the firm might become insolvent in some circumstances," Fed governor Daniel Tarullo said.

Of course, the TLAC solution has been both a disruption and a cost for banks: as well as changes to bank balance sheets, the clean holding company requirement is expensive, as are the legal restructurings involved. But the prize of ending too big to fail is considered paramount. According to Baer, and as reflected in this week’s living wills announcements, the final TLAC rule protects US taxpayers: requiring US G-Sibs to maintain enough loss-absorbing resources to be recapitalised during any resolution should ensure that any and all losses are borne by creditors and shareholders. Kenneth Bentsen, president and CEO of the Securities Industry and Financial Markets Association (Sifma), agrees. “This final rule ensures U.S. G-Sibs have adequate loss absorbing capacity to resolve, eliminating the risk of a taxpayer bailout,” he said.

The Fed is also pleased with the result.

These reforms have been guided by common sense principles: bank shareholders and debt investors place their own money at risk so depositors and taxpayers are well protected,” said Fed chair Janet Yellen.


  • The US Federal Reserve has released its final total loss absorbing capacity (TLAC), a requirement for G-Sibs to hold long-term debt which can be converted to equity during resolution;
  • Industry in the US welcomes what it regards as the end of too big to fail;
  • Fed concessions include how the final rule will grandfather existing long-term debt;
  • The Fed will also allow for US operations of certain foreign firms to issue long-term debt to external parties, rather than solely their parents;
  • Legally, the final TLAC rule will also make bank resolution a far easier practical proposition with the Fed’s clean holding companies requirement.

Overall, TLAC is an important plank in the overall achievement of ending too big to fail, significantly raising the levels of banks’ total loss absorbing capacity. 

"Bank resolution is not just about better planning and better laws – it also needs huge amounts of private capital to make a 'bail-in' work," said D. Wilson Ervin, vice chairman at Credit Suisse.  

According to Ervin, the big US banks have already issued nearly $1 trillion of long-term debt that could be used to recapitalise a failing bank and the new rule ensures that the scale of these resources will remain massive and that they are structured properly. As a result, he welcomes the Fed's TLAC rule as the decisive element in ending too big to fail in the US.

"It gives us a durable solution to the central challenge of the 2008 bank crisis," Ervin said.

But the legal aspects of the plan should be of equal interest to counsel.

“It’s only useful to have all of this long-term debt on balance sheets if in fact you can, as a practical and legal matter, bail it in,” said Baer, expressing support for the Fed’s decision to require clean holding companies. The requirement avoids the complexities of multiple creditors during any bankruptcy.

Other industry reactions to the final rule were positive, although not all questions have been answered by the Fed.

“We continue to question the need for, and calibration of, TLAC as applied to foreign banks’ US intermediate holding companies,” said Sally Miller, CEO of the Institute of International Bankers.

Miller points out that those companies, on average, have fewer assets than large and mid-size US-headquartered bank holding companies that are not subject to the Federal Reserve’s TLAC rules. 

Gregory Baer
Gregory Baer
“Nevertheless, we recognise that the Federal Reserve made certain adjustments in addressing our concerns in its final rules,” Miller said, highlighting a modification of the eligibility requirements for internal long-term debt to address tax concerns and expressing her hopes that the final requirements will enable characterization of these instruments as debt, and not equity, for federal income tax purposes. 

Fed concessions

In response to the comments it received during the rule’s proposal stage, the Fed made some notable changes to its final TLAC rule.

One change made by the Fed is that the final rule will grandfather long-term debt issued on or before December 31 2016, by allowing it to count toward a firm's long-term debt requirement. This concession was made in response to The Clearing House-led industry comment letter on the proposed TLAC rule back in April.

Other concessions from the Fed include how the US operations of certain foreign firms will be permitted to issue long-term debt to external parties, rather than solely to their parent companies, and that the long-term debt requirements of foreign firms were slightly reduced to be consistent with the treatment of domestic firms.

Naturally, the US government would never allow its financial system to fail if public funds were, on some almost unthinkably dark future day, eventually needed. That said, the final TLAC rule should finally put the too big to fail issue to bed. Whether that reality will reflect in the popular debate on America’s biggest banks, however, remain something yet to be seen.

See also

Kashkari: US banks still too ­big ­to ­fail
Industry examines Fed’s TLAC rule
US TLAC overshadowed by long term debt plans