Kroll Bond Rating Agency Releases Research Report: Will TLAC End Too-Big-to-Fail?

NEW YORK--()--Kroll Bond Rating Agency (KBRA) releases research report entitled: “Will TLAC End TBTF?” The report makes the following points:

  • The Federal Reserve Board (“FRB” or “Fed”) has proposed a new rule designed to fortify the capacity of the largest domestic and foreign banks identified as Globally Systemically Important Banks (GSIBs) operating in the United States to absorb losses under a resolution scenario.
  • The proposed new "total loss-absorbing capacity" or TLAC requirement, which would set a new minimum level of total loss-absorbing capacity that can be met with both regulatory capital and long-term debt, is described as a critical component of regulators’ objective to avoid another financial crisis and end “too big to fail.”
  • Given this regulatory movement toward “bail-in” of debt at bank holding companies combined with the Federal Deposit Insurance Corporation’s (FDIC) single-point-of-entry strategy (SPOE) for bank resolutions, KBRA has long assumed no government support when rating U.S. bank holding company obligations.
  • Under the SPOE strategy, the FDIC would put the parent of a U.S. GSIB into receivership and impose losses on the shareholders and creditors of the top-tier holding company. The new TLAC rule dovetails with the FDIC’s SPOE strategy. Consequently, significant losses to bondholders and other holding company creditors are a real possibility in the event of insolvency of a US GSIB.
  • KBRA believes that for the foreseeable future, U.S. GSIBs will benefit from some degree of extraordinary systemic support at the bank level. During the FDIC’s resolution process, critical operating subsidiaries of GSIBs would remain intact with continuity of services between the operating subsidiaries and the financial markets. As of today, in the event that a failed GSIB incurs losses in excess of the enhanced capital envisioned under TLAC, KBRA believes that the FDIC would absorb these excess losses, which would ultimately be borne by the U.S. banking industry.
  • Market participants and the U.S. GSIBs themselves have long factored in the potential for “bail in” of debt at bank holding companies. U.S. GSIBs have substantial levels of long-term debt at the holding-company level already. In fact, the Fed’s estimated TLAC shortfall of $120 billion represents only 1.2% of aggregate tangible assets. U.S. GSIBs have until the beginning of 2019 to comply and until the beginning of 2022 to fully comply with the final TLAC to risk-weighted assets ratio, the ratio associated with the largest shortfall in KBRA’s estimation.
  • KBRA believes that through the TLAC proposal, global regulators are taking steps in good faith to address the TBTF dilemma. Successful resolution of a failed GSIB will require close coordination among global regulators. Due to the likelihood of an adverse market reaction, liquidity support at key operating units of GSIBs in different nations will be needed during the resolution process to prevent the insolvency of a GSIB from becoming a global systemic event.

Please use the following link to view the report: www.krollbondratings.com/show_report/3280

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About Kroll Bond Rating Agency

KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).

Contacts

Analytical Contacts:
Kroll Bond Rating Agency
Ashley Phillips, Associate
aphillips@kbra.com, (240) 394-4150
or
Christopher Whalen, Senior Managing Director
cwhalen@kbra.com, (646) 731-2366
or
Joseph Scott, Senior Director
jscott@kbra.com, (646) 731-2438

Contacts

Analytical Contacts:
Kroll Bond Rating Agency
Ashley Phillips, Associate
aphillips@kbra.com, (240) 394-4150
or
Christopher Whalen, Senior Managing Director
cwhalen@kbra.com, (646) 731-2366
or
Joseph Scott, Senior Director
jscott@kbra.com, (646) 731-2438