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Bankers grapple with TLAC ramifications
November 20, 2014 / 6:18 PM / 3 years ago

Bankers grapple with TLAC ramifications

LONDON, Nov 20 (IFR) - The implications of plans to tackle the problems of banks considered Too-Big-Too-Fail was the hot topic of discussion at IFR’s annual FIG conference on Thursday.

Last week, the Financial Stability Board laid out plans that could require the world’s systemically important banks, or G-SIBS, to have a safety buffer of total loss absorbing capital (TLAC) equivalent to at least 16%-20% of their risk-weighted assets from January 2019.

“This has been some time coming given the direction of the regulatory environment,” said Sandeep Agarwal, head of EMEA debt capital markets (DCM) at Credit Suisse. “However, the quantum of what banks might have to do is what has taken people by surprise. It will lead to a fundamental shift for banks.”

While the basic principle of TLAC appears straightforward, the practical considerations are not.

David Marks, chairman of financial institutions group (FIG) DCM at JP Morgan said that G-SIBS could need to issue up to issue up US$1.6trn equivalent of debt to meet the new requirements, although that number would be smaller once outstanding senior and capital bonds were netted.

According to research from Barclays, gross issuance of TLAC-eligible senior debt from European G-SIBs could amount to US$480bn over the next four years.

“Banks are going to start upping their issuance programmes,” Marks said.

Members of the panel called “Lessons from Brisbane, understanding the new world of TLAC” agreed that banks’ funding costs would likely increase as a result.

“Is there enough profit in banks? What will the new valuations be? What happens to equity and return on equity?” added Colin Lawrence, a partner at Ernst & Young.

Robust Additional Tier 1 sales earlier in 2014 illustrates that the investor base for new style capital instruments has developed rapidly but it still needs to grow further, if only to ensure that banks can meet their new requirements in tough times too.

“A lot of investors are more focused on market-to-market moves than fundamental value,” said Barry Donlon, head of capital solutions at UBS, during another panel called Investor perspectives.

“Until we have more fundamental value driven investors involved, we will continue to have volatility in the market which could potentially be damaging to its growth.”


TLAC could also have broader implications on how banks are set up and think about their capital structure.

Because the type of instruments that can meet these requirements must be contractually, statutorily or structurally junior to all excluded liabilities, European banks will potentially either have to create holding company structures or issue contractually subordinated senior debt.

However, unlike their UK, US and Swiss counterparts, the corporate structures of most European banks do not have holding companies.

“It works in the US, UK and Switzerland. But it doesn’t make sense for everyone in Europe,” said Khalid Krim, head of capital solutions at Morgan Stanley. “It doesn’t make sense to go holco-loco and we need implementation to be tailor made to Europe.”

Nigel Howells, head of EMEA capital securities at UBS, said it was important not to ignore how group structures have evolved and how the European banking sector works.

“TLAC is a new concept, which has emerged very quickly. European regulation says nothing about TLAC yet - we can’t make assumptions.”

Bankers and investors agreed however that the new requirements would push banks to be more transparent. “There is a huge disparity in Europe between UK/Swiss banks and other banks in the amount of data that they provide and TLAC will be a key element in improving transparency,” said Steve Hussey, head of financial institutions credit research at AllianceBernstein during the investor panel.


Because TLAC is part of the so-called Pillar 1 requirements under Basel, being non-compliant could potentially imperil a bank’s ability to make discretionary distributions such as dividend payments or Additional Tier 1 coupons.

“Coupon cancellation will become a much more major risk: it’ll be up to regulators to tell a bank it doesn’t have enough... (distributable profits) to distribute coupons,” said Sam Theodore, group managing director - financial institutions, Scope Ratings.

Laurie Mayers, associate managing director, EMEA Banking, Moody’s said the rating agency would add additional notches to consider coupon suspension, plus additional losses that may be absorbed by those instruments.” (Reporting By Alice Gledhill, Anna Brunetti, Editing by Helene Durand, Alex Chambers)

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