TLAC next steps: Quantitative Impact Study

TLAC proposed calendar in 2015

In November 2014, the Financial Stability Board (FSB) launched the new total loss-absorbing capacity requirement (TLAC). On 2 February, the consultation period ended with the financial industry having expressed their positions on TLAC. Since then, FSB is carrying out a comprehensive Quantitative Impact Study (QIS) to define the optimal calibration of the TLAC.

The QIS consists of four elements:

  •  Historical losses back-testing: setting a minimum TLAC as the maximum of 16-20% of RWA and at least twice the leverage ratio should be reviewed against the historical losses and recapitalisation needs over different crises.

 

  • G-SIB shortfall analysis: G-SIBs will have to fill out, during Q1 2015, several templates at different levels (at group consolidated and sub-consolidated per material or resolution entity levels) in order to assess the external and internal TLAC needs and current shortfalls. The analysis should be done in two ways: i) at group level , the consolidated TLAC in SPE banks and the sum of external TLAC of the resolution entities in MPE banks, and ii) at an individual level, the internal TLAC in SPE banks and external TLAC in MPE banks.

 

  • Market survey: The objective is to assess the potential changes in the debt markets in terms of market appetite, pricing, size, rating features, etc. The market survey is focused on three different targets based on their particular role: to issuers, to potential investors, and to credit rating agencies.

 

  • Macro- and micro-economic impact: Based on the previous outcomes, the macro- and micro-analysis will assess the impact on the financial sector and the effects on the whole economy.The FSB will revise the TLAC’s principles and features based on the industry responses and the QIS exercise outcome. Therefore, the quantitative impact assessment (QIS) should be very ambitious in providing granular results based on the specific features of each market. In particular, the QIS should review the impact on: developed and emerging market economies; international banking products; the depth of debt markets; the willingness of investors to buy this type of debt; the base of retail deposit funding; the refinancing risks and financial interconnectedness. Moreover, a particular question to solve is whether emerging markets with underdeveloped local capital and debt markets are prepared to assume the future external TLAC requirements of G-SIB’s subsidiaries located in those markets, at reasonable cost and without posing financial instability risks.

 

*See BBVA’s original report here.

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