On May 13, the Monetary Authority of Singapore said in a consultation paper that the Financial Stability Board total loss-absorbing capacity (TLAC) term sheet requires a global systemically important bank (GSIB) to maintain TLAC equal to at least 18% of its risk-weighted assets (RWA) at all times.
“MAS recognises that our local bank domestic systemically important banks (DSIBs) are smaller in size and have different risk profiles. As such, MAS proposes a risk-appropriate approach to set external TLAC at 14% of the DSIB’s RWA,” the May 13 consultation paper says.
The FSB TLAC term sheet also has a 6.75% leverage ratio requirement, which is not risk-sensitive. The TLAC leverage ratio requirement is meant to be a backstop against capital underestimation that may arise from risk-based approaches. Based on MAS’ close supervision of banks’ internal models and assessment of capital adequacy (including supervisory CAR), MAS is comfortable that no further leverage ratio requirement is necessary and will not introduce an external TLAC leverage ratio requirement for the local banks. Such an approach will avoid unnecessary complexity and compliance costs, MAS says.
MAS says TLAC may include regulatory capital, qualifying Tier 2 instruments and other liabilities that meet specified criteria. Common equity tier 1 capital used to meet the capital conservation buffer cannot count towards TLAC, but eligible regulatory capital may otherwise be included.
MAS has proposed a five-year implementation period for DSIBs to meet TLAC requirements primarily through the issuance of new TLAC instruments, starting from the date of notification that they are subject to TLAC requirements.
On June 4, Fitch Ratings says it is reviewing how the MAS wants local banks to hold extra “loss-absorbing” money or debt under TLAC. The Fitch announcement says currently, Fitch assumes the government would step in to support local banks if needed, and that helps local banks keep strong credit ratings.
See also: Revised framework for single family offices to take effect June 15
But if MAS makes banks hold enough TLAC, Fitch says it might stop assuming government support. That could lower some of the banks’ debt ratings, the ratings agency adds. Fitch likes to see banks hold at least 10% of their risk-weighted assets in junior debt (riskier debt). Singapore banks probably won’t reach that, so their ratings may not get a boost, Fitch says.
TLAC is a cushion so that if a bank gets into trouble, it can use this buffer instead of relying on government bailouts. In past financial crises, governments have had to bail out banks with public money to stop them collapsing. The concept of a bail-in (with the TLAC cushion) is such that if a bank fails, shareholders and certain bondholders absorb the losses, not taxpayers.
