The Basel Committee on Banking Supervision has published a final standard on the regulatory capital treatment of banks’ holdings of total loss absorbing capacity (TLAC) instruments. The standard seeks to reduce the risk of contagion within the financial system should a global systemically important bank enter resolution (G-SIB). It applies to both G-SIBs and non-G-SIBs.
The main elements are:
- Tier 2 deduction: banks must deduct holdings of TLAC instruments that are not already included in regulatory capital from their own Tier 2 capital;
- Threshold below which no deduction is required: the deduction is subject to the thresholds that apply to existing holdings of regulatory capital and an additional 5% threshold for non-regulatory-capital TLAC holdings only; and
- Instruments ranking pari passu with subordinated forms of TLAC must also be deducted.
The standard takes effect on 1 January 2019 for most G-SIBs but later for those whose headquarters are in emerging market economies.
View Final standard on TLAC holdings published by the Basel Committee, 12 October 2016