What is TLAC and why must G-SIBs hold it in addition to regulatory capital?

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AcadiFi · Accepted Answer

Total Loss-Absorbing Capacity (TLAC) is the additional loss-bearing resource that globally systemically important banks (G-SIBs) must hold so that in resolution, shareholders and certain creditors — not taxpayers — absorb losses and recapitalize the bank.

FSB TLAC standard: G-SIBs must hold Pillar 1 TLAC ≥ 18% of RWA and ≥ 6.75% of leverage exposure (both phased in and now fully binding). TLAC includes regulatory capital (CET1, AT1, Tier 2) PLUS eligible senior non-preferred debt issued by the resolution entity, subordinated contractually or structurally to operating liabilities (deposits, derivatives, trade payables).

Eligibility criteria for debt:
- Unsecured, minimum 1-year remaining maturity
- Subordinated (structural via HoldCo issuance or contractual)
- No set-off or acceleration clauses that impede bail-in
- Issued under domestic law or with bail-in recognition clauses

```mermaid
flowchart TD
  A[Resolution Entity HoldCo] --> B[Issues TLAC Debt]
  B --> C[External Investors]
  A --> D[Downstreams to OpCo]
  E[Crisis] --> F[Bail-in Cascade]
  F --> G[CET1 Wiped]
  G --> H[AT1/T2 Converted]
  H --> I[Senior Non-Preferred Bailed-in]
  I --> J[Depositors Protected]
```

Example: Weltmar Global Bank Group, a Bucket-2 G-SIB with 2.0% G-SIB surcharge, has $1.8T RWA. TLAC requirement = 18% × $1.8T = $324B. Current stack: CET1 $210B + AT1 $28B + T2 $40B + eligible senior non-preferred $72B = $350B. Complies with 1.6% headroom.

TLAC enables Single-Point-of-Entry (SPE) resolution: supervisors bail in HoldCo creditors and recapitalize operating subsidiaries without interrupting critical functions.

What is TLAC and why must G-SIBs hold it in addition to regulatory capital?

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