Bank Resolution and Capitalization: Anticipated TLAC Proposal:  Impact on Banks’ Balance Sheet Structures and Resolution Plans

Sullivan & Cromwell LLP - September 23, 2014

It appears increasingly likely that the Financial Stability Board (the “FSB”), followed by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) (and other national regulators, possibly including other U.S. banking agencies), will soon issue proposals establishing Total Loss Absorbing Capacity (“TLAC”) requirements (the “TLAC Proposal”).  TLAC consists of regulatory capital and long-term debt that in the context of a resolution (or possibly in anticipation of a resolution) is designed to absorb losses through write-downs, forgiveness or conversion into common equity and thereby avoid the need to use taxpayer funds to prevent systemic disruption.  The TLAC Proposal would apparently apply to the 29 banks (including eight U.S. banks) identified by the FSB as Global Systemically Important Banks (“G-SIBs”).

Although specific details of the TLAC Proposal are not publicly available, and are presumably still being formulated, it could have a significant impact on G-SIBs’ balance sheet structures and resolution plans.  Accordingly, this memorandum outlines some of the likely issues to be presented by the TLAC Proposal.