1

Loss Absorbing Capacity

December 10, 2014
Background

 Firms need a sufficient amount of unsecured liabilities to 

absorb losses and to immediately stabilize the critical 

functions of the firm following a failure 

 This is in addition to requirements to hold sufficient 

equity capital to potentially avoid a resolution through 

recovery measures

 In the U.S., since late 2012 - early 2013, the FRB has 

discussed a potential requirement for firms to issue 

minimum amounts of unsecured long-term debt

 Internationally, the FSB recently developed a proposal on 

total loss absorbing capacity, or TLAC

2
TLAC − Status

 Consultation on loss absorbing capacity for global 

systemically important banks released by FSB in 

November 2014

 The comment period runs through February 2, 2015

 Quantitative Impact Study and market survey to 

be carried out by early 2015

 Standard to be implemented at the national level

3
Key Terms − External TLAC 

 Minimum external TLAC requirement of 16-20% RWAs; 

twice Basel 3 Tier 1 leverage ratio requirement

 Jurisdictions may impose more stringent requirements

 Requirement applicable to each ‘resolution entity’ within 

the group

 Debt component: At least 33% of the minimum 

requirement should be met with T1/T2 debt or nonregulatory capital instruments

 Subordination requirement

4
Key Terms − Internal TLAC 

 Loss absorbing capacity is required to be prepositioned 

with ‘material subsidiaries’

 Each material subsidiary must maintain internal TLAC of 

75-90%

 Jurisdictions may impose more stringent requirements

 Internal TLAC should be pre-positioned on-balance sheet, 

unless otherwise agreed

 Secured guarantees may be utilized if agreed between 

home and host

5
6

Comments to SPOE Notice

December 10, 2014
SPOE Notice

29 written comments received

Issues:

 Global cooperation

 Liquidity and capital

 Valuation/Claims

 Exit from bridge financial holding company

 Subsidiarization

7
Global Cooperation

Comments focused on:

 Cooperation during a crisis

 Desire for binding agreements by the FDIC

 Local-level loss absorbing capacity 

 Possibility of amending Chapter 15 of the Bankruptcy Code to add 

the recognition of foreign resolution regimes

8
Capital and Liquidity

Comments focused on:

 Private-sector financing in a crisis

 Recapitalization and the amount of intercompany debt needed at 

each subsidiary

 Insolvent subsidiaries (especially if financial distress infects the entire 

group) 

 Repayment of counterparties 

 Perception of OLF as a bail-out mechanism

9
Valuations/Claims

Comments focused on:

 Need for specific information about claims and valuation processes

 Difficulty of valuing assets and determination of which claims are fully 

secured

 Ability of creditors to price risk 

 Disparate treatment

 Creditors’ committee

 Franchise value

10
Exit from Bridge Financial Holding Company

Comments focused on:

 Maximizing value

 Creating multiple firms that are less complex

11
Subsidiarization

Comments focused on:

 Promotion of simpler and more transparent corporate structures

 Equivalence to pre-ring fencing

 Separation of subsidiaries for support services

12
13

Wind-Down in an SPOE Resolution

December 10, 2014
14

Imperative for Wind-Down in Resolution

 Title II requires a report to Congress within 60 days:

“describing the plan of, and actions taken by, the Corporation to wind 

down the covered financial company”

 The FDIC has established winding-down as an integral 

part of the single point of entry resolution process

 In addition to changes that occur during the bridge 

period, a plan for winding down would be required by 

the FDIC for any entities that emerge from the bridge

 This plan would ensure that any emerging entities:

 Would not pose systemic risk 

 Are resolvable under the Bankruptcy Code
15

Driving Factors of Wind-Down Process:

 Current efforts to simplify operations and provide for 

optionality in resolution will facilitate winding down under 

bankruptcy or Title II

 In Title II, an initial operating agreement would require 

bridge management to formulate a plan for winding 

down

 This would necessarily include identifying and addressing the 

causes of failure to ensure viability

 Other steps to make the firm smaller and less complex might entail:

 More closely aligning operations and legal entity structure

 Dividing the company into several companies or selling parts of entities

 Some parts of the business would likely be liquidated as 

a result of the failure
16

Type of Activities Would Impact Approach:

Representative G-SIFI Organizational Chart (Simplified)

Parent Hold Co.

U.S. Bank (IDI) 

Cayman 

Branch 

London 

Branch

U.S. Commercial 

Broker-Dealer

U.K. Commercial 

Broker-Dealer

India Service 

Co.

U.S. Retail 

Broker-Dealer

Japan 

Commercial 

Broker-Dealer

U.S. Asset 

Management
17

Timeframe and Post Bridge Requirements:

 It will likely be necessary that some divestitures, 

liquidations, or other wind down actions initiated during 

the 6 to 9 month bridge period will be completed after 

the termination of the bridge 

 Wind-down plans would require FDIC approval and be 

enforceable subsequent to the termination of the bridge

 Ongoing requirements for winding down would need to 

be disclosed and factored into any valuation

 Living will requirements would further ensure ongoing 

resolvability under the Bankruptcy Code