February 12, 2016
Comment on the Consultative Document: TLAC Holdings issued by the Basel Committeeon Banking Supervision
Japanese Bankers Association
We, the Japanese Bankers Association (“JBA”), would like to express our gratitude
for this opportunity to comment on the consultative document: TLAC Holdings issued
by the Basel Committee on Banking Supervision (the “BCBS”).
We respectfully expect that the following comments will contribute to your furtherdiscussion.
<<General Comments>>
We understand the intention of the Consultative Document to establish aframework for the purposes of mitigating the risk of contagion with a view to ending theTBTF problem. However, we do not support the proposed approach to reduce the risk ofcontagion through the Tier 2 deduction approach because such approach may undermine
consistency between the proposed regulatory framework and the Basel III
corresponding deduction approach, and prevent banks from ensuring stable issuance ofTLAC eligible instruments and liabilities in the market.
With the objective of stabilising the global financial system, it is crucial for each
G-SIB to ensure the necessary volume of TLAC eligible instruments and liabilities
without distorting the bond market and having an adverse impact on real economy. To
this end, a framework needs to be designed in a manner to ensure smooth issuance of
TLAC eligible instruments and liabilities in the market, taking into account theconditions unique to each jurisdiction’s bond market, for example, differences acrossjurisdictions in terms of capital market participants and investors classes in corporate
bonds issued by banks.
Holdings of TLAC eligible instruments and liabilities are similar to general credit
exposures in that they may incur losses upon failure of a G-SIB. A global frameworkhas been established to address the concentration risk in credit portfolios through large
exposure limit, and the limit on credit concentration to G-SIBs has been enhanced.
Accordingly, the contagion of risks through the holdings of TLAC eligible instruments
and liabilities will also be covered by the large exposure framework.
The TLAC requirements are a significant framework that minimise any effects on1

the financial system and real economy arising from the failure of G-SIBs. At the sametime, they are a new framework imposed, which focuses on the holdings of TLAC
eligible instruments and liabilities, in addition to the existing capital requirements.
Therefore, it is not possible to completely assume at the moment what kinds of effects
may be caused by the implementation of the TLAC requirements on, for example, themarkets, real economy, and market liquidity currently showing a significant decline.
Further, the interaction and a cumulative effect of various regulatory requirements
currently being discussed, such as the review of measurement approaches for risk
weighted assets, are uncertain. Therefore, the BCBS is requested to take a reasonableapproach in carefully making decisions concerning the holdings of TLAC eligible
instruments and liabilities to avoid an excessive regulation.
Our comments on specific issues, including the approaches proposed in theConsultative Document, are provided in the next section.
<<Specific Comments>>
1. Approach for the treatment of TLAC holdings(1) We are opposed to the Tier 2 deduction approach. Separate approaches should beestablished for G-SIBs and non-G-SIBs
We do not support the proposed Tier 2 deduction approach. Tier 2 capital which isa capital instrument and TLAC eligible instruments and liabilities (e.g., TLAC eligible
senior debt issued by a holding company) with the nature of debt have different inherent
risks and features (in the event of resolution by a financial institution, Tier 2 will be
used to absorb losses, in a manner subordinated to senior debt). Consequently, it is notreasonable to require the deduction of TLAC eligible instruments and liabilities fromTier 2, lacking consistency with the existing Basel framework, including thecorresponding deduction approach.
While the Consultative Document highlights, as a benefit of the Tier 2 deduction
approach, that it helps to reduce investments in TLAC eligible instruments andliabilities by banks, we believe the primary focus should not be placed solely on
facilitating the reduction. The requirements for TLAC Holdings aim to mitigate theeconomic impact caused by the failure of a G-SIB by ensuring that TLAC instruments
issued by G-SIBs are broadly held in smaller volumes. To this end, it is also asignificant challenge to realise stable issuance of TLAC eligible instruments and2

liabilities through the market. Given that the market size and participants differ
significantly across jurisdictions, and if financial institutions are unduly restricted inholding TLAC eligible instruments and liabilities, stable issuance of TLAC eligible
instruments and liabilities may be impaired. Further, as a result of prioritising only theprevention of the risk of contagion, the liquidity of the bond market may considerably
decline and market volatility may increase, which in turn increase the possibility ofcrisis. Such risk should also be assumed.
The Summary of Findings from the TLAC Impact Assessment Studies issued by theBCBS on November 9, 2015 states that, according to the QIS, in general terms, neither
G-SIBs nor non-G-SIBs hold very significant amounts of G-SIB-issued TLAC, andeven when moving to the wider definitions, G-SIBs do not currently hold significant
amounts of each other’s liabilities. The QIS however covers only 134 banks from acrossthe world, and responses are made on best-efforts basis for this study that covers a new
aspect which has never been addressed before, i.e. the holding amount of TLAC eligible
instruments and liabilities. Therefore, this QIS may not be able to precisely capture theimpact of introducing the TLAC Holdings framework. Further, the QIS could not
sufficiently capture the degree of impact because its analysis is limited to a static
analysis, and does not undertake a dynamic analysis that covers cases where businessenvironment surrounding banks has drastically changed or TLAC holdings framework
is imposed. Consequently, the approach to determine the holdings requirements
primarily based on the TLAC QIS is not considered to be appropriate.
It is more reasonable to establish a framework that applies separate approaches
depending on the degree of systemic risk associated with respective banks that hold
TLAC eligible instruments and liabilities, in light of the intention and objective of theConsultative Document, which is to establish a framework that reduces the risk ofcontagion associated with excessive TLAC holdings with a view to ending the TBTF
problem. Therefore, applying different approaches tailored to G-SIBs and non-G-SIBs
that have a different degree of systemic risk are considered to be appropriate, asdiscussed below.
(i)Approach for G-SIBs
For G-SIBs, we propose the approach to deduct holdings of eligible TLAC
instruments and liabilities issued by other G-SIBs from the amount of their own issued
eligible TLAC instruments and liabilities.
The objective to restrict excessive holding of TLAC instruments and liabilities by3

G-SIBs and mitigate the risk of contagion across G-SIBs will be attained without taking
the proposed Tier 2 deduction approach. We propose an alternative approach ofdeducting holdings of eligible TLAC instruments and liabilities issued by other G-SIBs(excluding regulatory capital instruments) from the amount of their own issued eligible
TLAC instruments and liabilities (excluding regulatory capital instruments; if theamount of their own issued eligible TLAC instruments and liabilities is not sufficient toabsorb the deduction, the excess should be deducted from their own Tier 2.)(ii)

Approach for non-G-SIBs
For non-G-SIBs which are not identified as systematically important in the global
financial system, the introduction of a new framework for TLAC holdings is not
appropriate. The existing large exposure framework can reduce the risk of contagion.
The Consultative Document specifies the following as shortcomings of theapproach using the existing large exposure framework for reducing the risk ofcontagion: (i) it would not remove double-counting of TLAC, and (ii) it provides nopractical upper bound on the losses that banks can suffer from the failure of multiple
G-SIBs. For the shortcoming (i), non-G-SIBs, in the first place, are not required to issue
TLAC instruments and liabilities, and therefore the double-counting issue of TLAC
would not occur. Whereas with regard to (ii), further reduction of risks through theintroduction of an additional framework other than the large exposure limits lacks
necessity, because the potential expansion of losses through a chain-reaction bankruptcyof multiple G-SIBs can be reduced to a considerable extent by enhancing the prudential
regulations such as the implementation of G-SIB buffer and TLAC holding
requirements between G-SIBs. Additionally, the requirement proposed in theConsultative Document contradicts the FSB TLAC framework in that it is under theassumption that the simultaneous failure of multiple G-SIBs will occur. In the FSB
TLAC framework where the objective is to establish an orderly resolution of a financial
institution, such systemic risk is not taken into consideration.
In this view, the new framework should not be introduced for TLAC holdings by
non-G-SIBs. Further, the Tier 2 deduction approach proposed by the BCBS, if applied,would complicate the framework, since this would have an impact on regulatory capital(CET1, AT1 and Tier 2) defined under the current Basel III framework.
The Consultative Document also emphasises ensuring the level playing field with
non-G-SIBs. However, since equal treatment is not applied to non-G-SIBs in the firstplace in that the TLAC framework is only applied to G-SIBs, applying the same
treatment for the deduction approach is considered to lack necessity.
4Introducing a new TLAC requirement to non-G-SIBs may lead to reducing theamount of TLAC holdings by banks subject to the prudential regulations including
Basel III even carried out within appropriate risk-taking activities, and limiting the typesof investors. Such situation may prevent issuance of TLAC eligible instruments andliabilities in the market.
Moreover, while the Tier 2 deduction approach to non-G-SIBs proposed by theBCBS, if introduced, would enhance the stabilisation of the banking system, it wouldresult in an increasing reliance on specific sectors that are not subject to the prudentialregulations, such as asset managers, pension funds and retail investors, on a global basis,and risks may concentrate on these sectors, thereby undermining the stability of theoverall financial system. In particular, it is necessary to be reminded that issues
associated with loss-absorbing capacity by TLAC eligible instruments and liabilities
held by retail investors have not yet been addressed. Further, as discussed above, theliquidity of the bond market may considerably decline and market volatility may
increase, which in turn increase the possibility of crisis. Such risk should also be
assumed.
Introduction of the Tier 2 deduction approach to non-G-SIBs does not help
designing a framework for loss allocation in a wide and shallow manner at a financialsystem wide level from a perspective of reducing the risk of contagion.
(2) Common Equity Tier 1 deduction and penal risk weight on TLAC holdings
We oppose to the “Common Equity Tier 1 deduction” and “penal risk weight onTLAC holdings” which would be stricter rules than the Tier 2 deduction approach.
The Consultative Document notes issues regarding the Common Equity Tier 1deduction, specifying that such an approach would either result in a more onerous
treatment of TLAC holdings than for Additional Tier 1 and Tier 2 capital holdings under
Basel III, or would necessitate a change to Basel III framework. On the other hand, as topenal risk weight on TLAC holdings, it raises an issue that, unless the risk weight is set
at a level that is equivalent to a deduction, such an approach will not remove the double
counting of TLAC. We also think, as specified by the BCBS, that these approaches haveissues; for example, these may be inconsistent with the objective of the Basel III
corresponding deduction approach.
If an approach that will be stricter than the Tier 2 deduction approach proposed in
the Consultative Document is implemented, such an approach may disincentivise banks
for holding TLAC eligible instruments and liabilities within appropriate risk-taking
activities, and hence prevent issuance of TLAC eligible instruments and liabilities in the5

market. Or, these approaches may result in holdings of TLAC being excessively
concentrated in certain sectors, thereby undermining the stability of the overall financialsystem.
(3) If the deduction approach would be introduced, mitigating measures should be put
in place(i)
TLAC holdings exemption threshold
We propose to recaliberate the level of threshold permitted under the Basel III andestablish a new threshold at 12.5% of CET1 for the holdings of TLAC eligible
instruments and liabilities, separately from the existing threshold set for regulatory
capital.
While including TLAC eligible instruments and liabilities in the thresholdestablished in the double gearing provision under the Basel III, if the threshold is notrecaliberated, such threshold may have a significant impact on the banks’ investment
management strategy.
Further, G-SIBs are required to issue TLAC eligible instruments and liabilities inaddition to existing regulatory capital (CET1, AT1 and Tier 2) for compliance with theTLAC requirements established by the FSB. Consequently, market-making capacity thatenables smooth issuance of eligible TLAC instruments and liabilities should be securedby the expansion of the existing threshold.
Our proposal of the specific level of the threshold is to set a new threshold at a
12.5% of its own CET1 for holdings of TLAC eligible instruments and liabilities inaddition to the existing threshold (10% of CET1). This 12.5% is determined bydeducting the existing threshold, i.e. 10%, from 22.5% which is calculated according to
the ratio of minimum TLAC requirement to current minimum capital requirement (= thelevel of existing threshold, i.e. 10%, x (minimum TLAC requirement 18% / current
minimum capital requirement 8%).
(ii)

TLAC holdings exemption for the purposes of market-making related activities
TLAC holdings for the purposes of market-making related activities should beexcluded from the TLAC holdings framework.
G-SIBs have a considerably high presence in the underwriting and market-making
activities in the capital markets of major jurisdictions. Given this, to ensure smoothissuance of TLAC eligible instruments and liabilities in the market and liquidity in thesecondary market, it is considered necessary to take measures, for example, to ease thededuction requirement for temporary holdings for underwriting purposes and certain6market making activities.
Additionally, following transactions should be excluded from the TLAC
requirements: transactions that are executed by G-SIBs and non-G-SIBs in relation tounderwriting and market-making related activities of TLAC eligible instruments andliabilities and that are reasonably designed not to exceed the needs of customers, users
and counterparties. From risk management perspectives, in practice, there are cases
where the maximum holding period is set at 6 months for senior debt held for thepurposes of market-making related activities. Therefore, TLAC eligible instruments andliabilities with the holding period of 6 months or less should be excluded from the scopeof the TLAC holdings requirements.
Further, the QIS determines the impact based only on the size of TLAC holdings. It
is necessary to note that, even if the size of TLAC eligible instruments and liabilities
held by individual banks is small, if banks curtail their market-making related activities
at the same time, such behavior may have a significant impact on the issuance andliquidity of TLAC eligible instruments and liabilities.
(iii)

Transitional arrangements
Certain transitional arrangements should be put in place.

If the holding requirements unique to TLAC would be introduced, this may
drastically change the investors’ behavior. As such, the impact on the buy side of TLAC
eligible instruments and liabilities are difficult to predict completely. To ensure smoothissuance of TLAC eligible instruments and liabilities in the market, certain transitionalarrangements should be put in place as mitigation measures. In light of this, TLAC
eligible instruments and liabilities held before the finalisation of TLAC Holdingrequirements should at least be excluded. In addition, consistent with phase-in
implementation of deductions under Basel III, it is requested to introduce a phase-inarrangement to “raise the percentage of deduction over 5 years from the introduction ofthe framework in 2019”.
2. Definition of a TLAC Holding(1) Debt liabilities that formerly counted as TLAC but now no longer qualify as they
have fallen below the 1 year residual maturity requirement
To ensure consistency with the TLAC requirements established by the FSB, debt
liabilities that formerly counted as TLAC but now no longer qualify as they have fallen
below the 1 year residual maturity requirement should be excluded from the TLAC
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holdings requirements.
The TLAC requirements, including the TLAC Term Sheet, established by the FSB
set out that debt liabilities whose remaining maturities are less than that reach the one
year minimum maturity threshold will not qualify as TLAC. On the other hand, theseliabilities are subject to the TLAC holdings requirements proposed under theConsultative Document. Therefore, the requirements proposed by the BCBS are notconsistent with the FSB’s TLAC requirements in that the TLAC issuer side and theholder side are subject to the different regulatory standards. (If debt liabilities thatformerly counted as TLAC but now no longer qualify as they have fallen below the 1year residual maturity requirement will be included in the scope of the holdings
requirements, such debt liabilities should be counted as an eligible TLAC liabilities
from the perspective of a G-SIB issuer.) Further, such difference would act as asignificant disincentive for investors to purchase such debt liabilities, thereby
preventing smooth issuance of TLAC eligible instruments and liabilities.
(2) Instruments subordinated to Excluded Liabilities
TLAC eligible instruments and liabilities held by a resolution entity should beexcluded from the TLAC framework.
The Consultative Document proposes to include in the TLAC holdings
subordinated instruments that rank pari passu with TLAC eligible instruments andliabilities, but have never qualified as TLAC. However, Excluded Liabilities held by aresolution entity should be excluded from the TLAC holdings requirement since suchholdings are not counted as TLAC. Excluded Liabilities which are not bailed-in shouldat least be excluded from the TLAC holdings requirement.

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