The following Financial Services practice note Produced in partnership with Steven Hall of KPMG provides comprehensive and up to date legal information covering:
The origins of the international concept of total loss absorbing capacity (TLAC) lie in the lessons learned during the financial crisis. When the crisis hit and the scale of the losses incurred by the large international banks was fully realised, global regulators faced two inter-linked dilemmas:
the operations of these banks were so complex that regulators did not fully understand the economic impact of allowing them to fail; and
these banks did not have sufficient resources to allow regulators to carry out an orderly wind-up of their operations with minimal loss to depositors
As a result, large banks across the world received governmental support, and ultimately taxpayer bail-out, in order to avoid financial collapse. The thrust of international regulation since the crisis has concentrated on identifying solutions to avoid this situation, better known as ‘too big to fail’, occurring in future.
One of these solutions is the concept of loss absorbing capacity. The central purpose of TLAC is to ensure that those banks deemed ‘too big to fail’, also known as globally systemically important banks (G-SIBs), have sufficient capacity to wind-up their operations in an orderly fashion without recourse to the government. In particular, this means that those parts of the bank which are identified as ‘critical economic functions’ can be continued as the bank is resolved. TLAC therefore puts the onus on the
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