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

2. TLAC: overview and objectives

3. TLAC: what’s changed?
Calibration set at 16% RWA and 6% LR from 1 January , 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 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. International coordination: what next?
The FSB published Principles for Cross-border Effectiveness of Resolution Actions in November 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)

10. 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)

11. 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