TCH Leads Industry Response to Fed’s TLAC-LTD Proposal

The Clearing House (TCH), joined by SIFMA, ABA, FSR, and FSF (Associations), filed comments with the Fed in response to its proposal to impose a total loss absorbing capacity (TLAC), long-term debt (LTD) and related “clean holding company” requirements on G-SIBs. The comment letter expresses the industry’s strong support for an appropriately calibrated TLAC requirement for G-SIBs, which is a crucial aspect of ending TBTF by helping ensure that these institutions have enough loss absorbing resources to be resolved in an orderly way. While supporting the framework of the proposed rule, the Associations assert that the proposal contains a number of requirements that are counterproductive or unnecessary to achieving the Fed’s policy objectives. Most notably, the Associations recommend eliminating the proposed rule’s separate LTD requirements.

Additionally, the Associations argue that the required amounts of TLAC and LTD under the proposed rule are substantially higher than necessary to ensure that a U.S. G-SIB can be resolvable under any reasonably foreseeable severely adverse scenario, and recommend that the TLAC minimum (and the LTD minimum, if retained) should be more appropriately calibrated. Absent sensible recalibration, the Associations contend that these excessive requirements will increase the cost of borrowing by U.S. G-SIBS, which in turn may increase the cost of credit to the market and run a risk of reducing the amount of credit available to the economy. The Associations also urge a more rational standard for determining the kinds of instruments that qualify as ‘eligible debt securities’ under the rule, as well as the kind of liabilities that should be permitted to stay on the parent holding company balance sheet. Finally, the Associations urge the Fed to, at a minimum, include certain grandfather provisions to make compliance reasonably achievable. The final submission was comprised of two comment letters – one focused on U.S. G-SIB issues and the other on foreign G-SIB/IHC issues.