Banking Organization TLAC Holdings: Basel Committee Issues Final Standard on Capital Treatment of TLAC Holdings

Sullivan & Cromwell LLP - October 17, 2016

On October 12, 2016, the Basel Committee on Banking Supervision published a final standard (the “Final Standard”) on the regulatory capital treatment of holdings by banking organizations—both G-SIBs and non-G-SIBs—of total loss-absorbing capacity (“TLAC”) instruments issued by G-SIBs, implementing a provision of the Financial Stability Board’s November 2015 TLAC Term Sheet (the “FSB TLAC Term Sheet”). The Final Standard is generally consistent with the Basel Committee’s November 2015 consultative document (the “Proposal”). Both address TLAC holdings by building upon the Basel III capital framework’s provisions addressing deductions by banking organizations of their holdings of regulatory capital instruments issued by other banking organizations.  Those provisions apply a “corresponding deduction approach,” generally requiring that holdings of regulatory capital instruments be deducted from the corresponding regulatory capital component of the holder.  The Final Standard, like the Proposal, deviates from that approach by requiring that a banking organization’s holdings of TLAC instruments that do not otherwise qualify as regulatory capital (for example, senior debt) be deducted from the banking organization’s Tier 2 capital.

The Final Standard includes certain modifications from the Proposal in response to industry comments—most notably to facilitate market-making activities in non-regulatory capital TLAC instruments by introducing an additional threshold below which holdings of those instruments need not be deducted from Tier 2 capital.