NY Fed's Dudley Says TLAC Rule Stronger Than Global Standard

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By Jeff Bater

Nov. 18 — The Federal Reserve's crisis plan for megabanks is stronger in certain ways than a global standard, the regulator's New York bank president said.

In remarks for a conference in New York, William Dudley, who heads the New York Fed, said important progress has been made in making the resolution of the biggest banks feasible.

The Financial Stability Board (FSB) has published its plan for tackling banks seen as too big to fail; the regulatory body said Nov. 9 the most systemically important lenders must have total loss-absorbing capacity (TLAC) equivalent to at least 16 percent of risk-weighted assets in 2019, rising to 18 percent in 2022.

On Oct. 30, the Fed moved to apply the TLAC standard to eight of the biggest U.S. banks, estimating their total shortfall of long-term debt at $120 billion (211 BBD 211, 11/2/15). Under the proposed rule, banks would be required to hold enough debt that could be converted into equity if they were to falter.

U.S. Rules Stronger

“It is notable that, in several important respects, the proposed U.S. rules are stronger than the FSB standard,” Dudley said in remarks prepared for The Clearing House Annual Conference in New York.

Dudley said that with the new proposed requirements, if losses were to wipe out a firm's capital and push a firm into resolution, a sufficient amount of long-term unsecured debt would be available to absorb additional losses through a “bail in” process, recapitalizing the firm with no taxpayer bailout and without generating systemic financial contagion. “These proposed requirements should also improve market discipline by ensuring that each [global systemically important bank] has a class of creditors who are clearly ‘at risk,' and therefore have an incentive to monitor the firm's risk-taking,” he added.

Cross-Border Derivatives Contracts

In his remarks, Dudley also addressed the challenges in a resolution scenario posed by potentially disruptive close-out of cross-border derivatives contracts. He said there has been important progress on that front.

Eighteen global banks recently agreed to swaps contract changes designed to work with government rules for unwinding failed firms, a step that may help end the view that some financial companies are “too big to fail.” Counterparties of banks involved in resolution proceedings will delay contract termination rights and collateral demands under the plan announced last month by the International Swaps and Derivatives Association. The change is intended to give regulators more time to arrange orderly resolutions, ISDA said in a statement released in Washington Oct. 11 (199 BBD, 10/15/14).

However, Dudley said that within the official sector and the largest banks, “important work remains to be done to advance the capacity to effectively operationalize a GSIB resolution.” One example, he said, is establishing a more rational and less complex structure that takes into account the best alignment of legal entities and business lines to improve a firm's resolvability.

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor on this story: Mike Ferullo in Washington at mferullo@bna.com

For More Information 
Dudley's remarks are available at http://src.bna.com/9a.