Agencies Require Deduction of TLAC Debt Held by Category I and II Banking Organizations

On October 20, 2020, the federal banking agencies issued a joint Final Rule that requires advanced approaches banking organizations—firms designated as Category I or II under the Interagency Tailoring Rule—to deduct from regulatory capital certain investments in unsecured debt securities issued by U.S. or non-U.S. G SIBs.

The debt instruments covered by the Final Rule include not only unsecured debt instruments that qualify as TLAC, but also unsecured debt instruments that are pari passu or subordinated to such TLAC debt instruments. The deduction for covered debt instruments is implemented through the U.S. Basel III capital rules’ existing deduction framework for certain investments in regulatory capital instruments.

The Final Rule is broadly consistent with the Basel TLAC Holdings Standard, although the Agencies preserved the April 2019 Proposal’s more conservative, asymmetrical treatment of TLAC holdings by requiring Category I and II firms to deduct covered debt instruments from their regulatory capital, rather than from their TLAC. The Agencies rejected comments requesting that the Final Rule align with the Basel approach.

This Alert Memorandum provides a high-level overview of the Final Rule, and includes a decision tree illustrating the analysis necessary to determine whether deduction of covered debt instruments would be required. This Alert Memorandum also highlights key takeaways which address the Final Rule’s expected impact and its interplay with other regulatory initiatives.