Share:

Total Loss-Absorbing Capacity (TLAC) is a global regulatory standard developed by the Financial Stability Board (FSB) to ensure that Global Systemically Important Banks (G-SIBs) have sufficient loss-absorbing and recapitalization capacity in case of financial distress or resolution. The goal is to maintain critical economic functions and avoid taxpayer-funded bailouts.

Key Features of TLAC:

1. Scope: TLAC applies exclusively to G-SIBs, which are banks whose failure could significantly impact the global financial system.
2. Minimum Requirements:
   - As of 2022, G-SIBs must hold at least 18% of risk-weighted assets (RWAs) and 6.75% of total exposure (based on the Basel III leverage ratio)
   - These requirements are binding under Pillar 1, with additional firm-specific requirements under Pillar 2.
3. Eligible Instruments: TLAC includes equity, junior debt, senior subordinated debt, and certain senior unsubordinated debt that can be written down or converted into equity during resolution.
4. Internal and External TLAC:
   - External TLAC refers to instruments issued by the parent entity of a resolution group.
   - Internal TLAC involves instruments issued by subsidiaries within the group to ensure loss-absorption capacity at all levels.
5. Objective: To absorb losses and recapitalize banks during resolution while ensuring continuity of critical functions without public funds.

TLAC complements regional frameworks like the EU's Minimum Requirement for Own Funds and Eligible Liabilities (MREL), with both pursuing similar goals but differing in scope and calculation methods.