International coordination of resolution decisions, TLAC vs. MREL Sam Smith, FSB Secretariat Meeting of the CEPS Task Force Brussels,11 December 2015

TLAC: overview and objectives

TLAC: what’s changed? Calibration set at 16% RWA and 6% LR from 1 January 2019, 18% RWA and 6.75% LR from 1 January 2022 Two stage phase-in gives G-SIBs time to close TLAC shortfalls EME G-SIBs to meet the 16% requirement from 1 January 2025 and the 18% requirement from 1 January 2028 EME G-SIB conformance will accelerate if the corporate debt market reaches 55% GDP before end of 2020 The 2.5% RWA allowances for credible ex ante commitments and to partially recognise unsubordinated senior debt increase to 3.5% RWA as from 1 January 2022

TLAC: what’s changed? De minimis exemption to the subordination requirement to recognise that subordination of TLAC to every excluded liability may not be necessary or feasible MPE G-SIB requirements may be adjusted if the sum of resolution entity TLAC requirements is higher than the single requirement that would apply under SPE Issuance of TLAC from a wholly and directly owned funding vehicle permitted until 31 December 2021 Subsidiary regulatory capital no longer eligible as TLAC after 31 December 2021, except CET 1 minority interest and issuance by cooperative banks Structured notes remain excluded from TLAC

TLAC: international coordination The TLAC standard aims to facilitate home and host cooperation and minimise incentives for hosts to ring- fence assets domestically by ensuring that TLAC is distributed within resolution groups This is achieved through internal TLAC: the loss- absorbing capacity that resolution entities down-stream from the resolution entity to “material sub-groups” Internal TLAC is designed to provide material sub-group host authorities with comfort that in resolution they would not be exposed to loss, as losses will be up- streamed to the resolution entity This allows the sub-group to be recapitalised outside of resolution and continue to operate

TLAC: international coordination TLAC is down-streamed…. …and losses are up-streamed The proceeds of external TLAC are down-streamed to material sub-groups in the form of internal TLAC (e.g. capital, subordinated debt) This is pre-positioned on balance sheet Material sub-groups hold internal TLAC equivalent to 75-90% of the external TLAC requirement that would apply to the material sub-group Non-pre-positioned TLAC is maintained at the resolution entity to support subsidiaries as needed Host authority makes a determination that the sub-group has reached the point of non-viability With the consent of home authority, internal TLAC is ‘triggered’ Losses are up-streamed to the resolution entity, enabling the sub-group to be recapitalised without entering resolution In the absence of home authority consent, hosts retain the option of applying statutory resolution powers to the subsidiary Resolution entity Subsidiary B Other subsidiary C Subsidiary D Subsidiary A External TLAC Internal TLAC Material Sub-group 1 Material Sub-group 2 Resolution entity Subsidiary B Other subsidiary C Subsidiary D Subsidiary A Non pre-positioned TLAC Material Sub-group 1 Losses Material Sub-group 2

TLAC: international coordination Key features of the internal TLAC framework 16. INTERNAL TLAC Loss-absorbing capacity that resolution entities have committed to material sub-groups Material sub-groups consist of one or more indirect subsidiaries of a resolution entity Host authorities determine the composition of the material sub-group and distribution of internal TLAC in consultation with the CMG and home authority Material sub-groups must meet an internal TLAC requirement 17. MATERIAL SUB-GROUPS A sub-group is considered “material” if the subsidiary alone or the subsidiaries forming the sub-group meet at least one of four criteria. Three quantitative criteria (more than 5% of the group’s RWAs, operating income or leverage exposure) and one qualitative criterion relating to materiality in respect of critical functions List of material sub-groups is reviewed annually within the CMG 18. SIZE OF THE INTERNAL TLAC REQUIREMENT Each material sub-group must meet an internal TLAC requirement of 75-90% of the external TLAC requirement that would apply to the material sub-group Actual requirement determined by host authority in consultation with home authority Internal TLAC is pre-positioned on balance sheet Non-pre-positioned TLAC should be available to other direct/indirect subsidiaries 19. CORE FEATURES OF ELIGIBLE INTERNAL TLAC Core features are the same for internal TLAC as for external TLAC Internal TLAC must be statutorily or contractually subordinated to the sub-group’s excluded liabilities Internal TLAC must be written down or converted to equity without entry of the subsidiary into statutory resolution proceedings at the point of non-viability as determined by the host authority and subject to home authority consent

International coordination: what next? The FSB has set up a workstream to provide guidance on the implementation of internal TLAC mechanisms In particular, the workstream will consider: Identification of material sub-groups Quantum of internal TLAC Form of internal TLAC Trigger mechanisms Write down and / or conversion obstacles Guidance to be consistent with the TLAC term sheet Draft guidance expected to be published for public consultation by the end of 2016

International coordination: what next? The FSB published Principles for Cross-border Effectiveness of Resolution Actions in November 2015. A stock take on approaches and measures planned or being taken will be carried out by the end of 2016 But only a handful of jurisdictions have transparent and expedited processes to give effect to foreign resolution actions as required the Key Attributes The FSB published guidance on co- operation and information sharing with non-CMG host authorities in November 2015 CMGs have been established for all G-SIBs, and in 2015 a number of cooperation agreements (CoAgs) were signed (see left) But further work remains to finalise CoAgs for the full population of G- SIBs Resolution planning status for G-SIBs (source: 2015 FSB Report to the G20 on Progress in Resolution)

TLAC vs. MREL TLAC and MREL share the same underlying objective: Sufficient loss absorbing and recapitalisation capacity to implement an orderly resolution that ensures the continuity of critical functions without recourse to public funds MREL requirements for G-SIBs should be set consistent with the TLAC standard 2016 2017 2018 2019 2020 2021 2022 MREL requirements apply (from 1 Jan) EBA report to EC on MREL implementation (by 31 Oct) 16% TLAC RWA requirement (non-EME G-SIBs, from 1 Jan) FSB review of TLAC technical implementation (by end 2019) End of MREL transition period 18% TLAC RWA requirement (non-EME G-SIBs, from 1 Jan)

TLAC vs. MREL However, there are some differences in features and application A TLAC MREL Scope G-SIBs All EU credit institutions and investment firms Requirement Common minimum Set on a case-by-case basis Basis of requirement RWAs and Basel III leverage ratio denominator Own funds and total liabilities Subordination Mandatory (limited scope exclusions) Not mandatory (but may be required) Timeline From 1 January 2019 From 1 January 2016 Composition 33% debt expectation No debt expectation Capital buffers On top of Minimum TLAC Part of the MREL calculation Deduction treatment Yes (BCBS) N/A