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Basel Committee TLAC standard redefines bank capital

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The Basel Committee on Banking Supervision has published a final standard on the regulatory capital treatment of banks’ holdings of total loss-absorbing capacity (TLAC) instruments which will affect all systemically critical financial institutions

The standard is designed to limit contagion within the financial system if a global systemically important bank (G-SIB) were to face collapse.

This follows the release in November 2015 of the Financial Stability Board’s release of the Principles on loss-absorbing and recapitalisation capacity of G-SIBs in resolution and total loss-absorbing capacity (TLAC) term sheet. 

These standards introduce minimum TLAC requirements for global systemically important banks (G-SIBs).

Under the current Basel III framework, if the investing bank does not own more than 10% of the common shares of the issuer, then capital holdings are deducted only to the extent that they exceed a threshold. Amounts below the  threshold  are  risk-weighted  instead.   

The final standard includes the following elements:

  • holdings of TLAC instruments, and instruments ranking pari passu with subordinated forms of TLAC, that are not already included in regulatory capital must be deduced from Tier 2 capital;
  • the deduction is subject to the thresholds that apply to existing holdings of regulatory capital and an additional 5% threshold for non-regulatory capital TLAC holdings only; 
  • to be eligible for the additional 5% threshold, G-SIBs’ holdings must meet additional conditions, including being held in the trading book.

Effective date

The standard will take effect from 1 January 2019 at the same time as the minimum TLAC requirement for each G-SIB except for banks in emerging economies which will have an extended implementation period.

The introduction in the majority ofjurisdictions will coincide with the effective date for IFRS 9 Financial Instruments.

The Basel Committee on Banking Supervision Standard for TLAC holdings - amendments to the Basel III standard on the definition of capital is available here

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