TLAC that…or would you rather MREL? Warning: Acronym Overload!

Anybody who operates in the world of finance will be aware that it is beset by an ever-expanding array of acronyms, of which the two in the title of this piece are just a foretaste of the next stage of what is to come in banking regulation.

The former stands for Total Loss Absorbency Capacity and is an acronym that arrived with the recent Financial Stability Board (FSB) consultation paper on resolving  the now 30 Global Systemically Important Banks (G-SIBs); the latter stands for Minimum Requirement for own funds and Eligible Liabilities and is a concept that forms a key component of the European Union’s new Bank Resolution & Recovery Directive (BRRD.)

Both concepts, and the regulatory structures of which  they form a part, are the foundation of attempts to end the concept of Too Big (or Too Important) To Fail (TBTF/TITF), which resulted in the expending of hundreds of billions of tax Dollars, Pounds and Euros by governments desperate to avoid the total collapse of the global banking system and the socialization of risk for the benefit of shareholders and bank managements.

Not surprisingly, such largess not only severely strained many sovereign balance sheets (cf. Iceland and Ireland), but also led to the hunt for mechanisms that would either provide support to re-capitalize solvent but distressed banks, or, if they were beyond saving as going concerns, the resources to enable them to be “resolved” in ways that did not require further funds form the public purse.

While the detail and complexity of both the FSB proposal and EU Directive can cause synaptic overload (as is now increasingly the case with much regulation), their basic premise is fairly straightforward- namely that affected banks will need to comply not only with minimum capital requirements (as under Basel III, Fed rules, or the equivalent) for equity and other subordinated capital, but also to ensure that their balance sheets will contain sufficient other liabilities that can be used to absorb losses and write-downs on the asset side. Naturally, this sets the stage for some interesting discussions about which liabilities should or should not be included; how liabilities should be ranked; and even whether or not the ranking of existing obligations need to be changed (something explicitly contemplated by the FSB proposal). Full implementation of both TLAC and MREL should be expected by 1/1/2019. This may seem somewhat deferred, but the ramifications and consequences of the new requirements, as well as the planning needed to implement them, are significant; and will further distract bank managements from their core businesses.

All that being said, why should we at Awbury care about such matters?

While both developments are symptomatic of the regrettable secular decline of banks as providers of funding and many once “essential” businesses, as they face ever more onerous capital and other constraints, they also offer continuing opportunity to Awbury and its (re)insurance partners to provide our bank clients with solutions that not only assist with capital relief as now, but also will enable them to meet the burden of both TLAC and MREL in ways that are flexible, tailored and cost effective. In addition, using insurance-based structures, Awbury can offer its broader client base proven alternatives to replace those products either no longer available from their banks, or for which the cost is rapidly becoming uneconomic.

-The Awbury Team

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