Agencies Issue Proposal to Deduct TLAC Holdings from Regulatory Capital

Earlier this month, the Federal Reserve issued a joint proposal with the FDIC and OCC that would require “advanced approaches” banking organizations to deduct from regulatory capital certain investments in unsecured debt securities (whether or not they qualify as total loss-absorbing capacity) issued by U.S. and non-U.S. G-SIBs and their U.S. intermediate holding companies.

The proposed deduction for these “covered debt instruments” would be implemented through the U.S. Basel III capital rules’ existing deduction framework for certain investments in regulatory capital instruments.

The Proposal updates a never-finalized 2015 proposal by the Federal Reserve and generally is consistent with the Basel Committee’s 2016 standard on TLAC Holdings.  However, the Proposal includes two significant burden-reducing modifications to the original 2015 Federal Reserve proposal:

• First, consistent with revisions the Basel Committee adopted in its final standard in response to industry comments, the Proposal creates a new exclusion for limited amounts of covered debt instruments to enhance the liquidity of TLAC debt.
• Second, the Proposal would apply only to “advanced approaches” banking organizations, rather than to all banking organizations regulated by the Federal Reserve, as initially proposed in 2015.

This Alert Memorandum includes a high-level overview of the Proposal and “Key Takeaways” addressing the Proposal’s expected impact and its interplay with other regulatory initiatives.

Please click here to read the full alert memorandum.