On April 15 2016, the Japanese Financial Services Agency (FSA) published an explanatory document setting out the FSA's approach to introducing the TLAC framework in Japan.
The document was published in the context of the global discussions and follows the Financial Stability Board's release of the total loss-absorbing capacity (TLAC) term sheet in November 2015. The aim of these discussions is to ensure that global systematically important banks (G-SIBs) have sufficient loss-absorbing capacity available for authorities to implement orderly resolutions that minimise the impact on financial stability, maintain the continuity of critical functions and avoid exposing public funds to loss.
The primary points set out in the FSA's explanatory document are:
There are two conceivable resolution strategies for international systematically important financial institutions: the Single Point of Entry (SPE) strategy and the Multiple Point of Entry (MPE) strategy. The FSA revealed that it will take the SPE strategy, where resolution powers are applied only to the top of a group by a single national resolution authority.
For any entity to which resolution tools apply in accordance with the resolution strategy for G-SIBs, the FSA will require the issuance and maintenance of a certain volume of TLAC eligible instruments that have loss-absorbing capacity (External TLAC). The FSA also revealed that it considers there to be a statutory mechanism in Japan and therefore debt instruments do not have to contain a contractual trigger for loss absorption to qualify as External TLAC.
The FSA will require the relevant bank holding companies of G-SIBs to accept eligible instruments issued by their subsidiaries and distribute their TLAC to such subsidiaries. These subsidiaries will not only be selected from outside the resolution entity's jurisdiction, but also from the same jurisdiction.
The FSA also provided a detailed model of the intended procedures for the orderly resolution of Japanese G-SIBs. Further details are available on the FSA's website.
Although the FSA states that its explanatory document is subject to change in accordance with ongoing international discussions, it nevertheless provides a valuable index for the coming legislation in Japan.
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