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Glossary

Total loss-absorbing capacity (TLAC)

Category — Analytical Metrics
TLAC is an international standard developed by the Financial Stability Board (FSB) aimed at ensuring general financial stability, absorbing losses and allowing banks to recapitalize to continue to perform their functions while the resolution process is underway. The objective of the TLAC is to make debt / equity holders absorb losses (allowing a "bail-in"), instead of using public funds and thus avoiding government intervention to save banks.

The TLAC was first introduced on November 9, 2015 by the Financial Stability Board and refers to banks of "Global Systemic Importance" (G-SIB). It is aimed at ensuring that resolution authorities, in the event of a bank’s insolvency, can intervene using certain bank resolution tools, minimizing the liquidity risks of the financial system and ensuring that no public money is used by governments. in order to protect the banks and the system. Therefore, the TLAC is a requirement that all banks belonging to the G-SIB must comply with. This is a certain amount of liabilities readily subject to bail-in to be held by banking institutions.

From 1 January 2019, the first requirements that G-SIBs must comply with came into force. Subsequently, on 1 January 2022 they were further revised by the FSB.

These are, to date:

TLAC amount of 18% of risk weighted assets (RWA);

TLAC amount, moreover, equal to at least 6.75% of the leverage ratio;

However, regulators can always increase the minimum requirements if they believe this is necessary to ensure the financial stability and liquidity of the system. The TLAC does not affect the requirements of Basel III which must, in any case, be equally respected. In any case, the FSB requires that the TLAC be comprised of 67% equity and at least 33% of debt instruments.

The securities that can be held by banks such as TLAC are subordinated debt, shares, senior debt securities and in any case, unsecured liabilities with a maturity of at least one year.
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