Loss-absorbing capacity requirements for resolution: beyond G-SIBs
Following the Great Financial Crisis that started in 2007, authorities have developed resolution regimes and strategies to manage the failure of systemically important banks. Crucially, resolution requires funding, and one source of such funding is banks' loss-absorbing capacity (LAC). While the Financial Stability Board's TLAC Standard exists for the largest, most systemic banks, there is no equivalent alignment on how resolution of other banks should be funded. This paper discusses the use of LAC requirements to support the resolvability of systemic banks other than G-SIBs. Reviewing six jurisdictions, it finds that the scope of LAC requirements varies, but each is framed by systemic considerations. Similarly, there are different approaches to LAC calibration, typically reflecting the scope of application. The paper also finds that tailoring LAC calibration to individual banks may offer greater confidence that LAC levels will support resolution, but it increases complexity.
JEL classification: G01, G18, G21, G33
Keywords: bail-in, calibration, D-SIB, eligible instrument, recapitalisation capacity, regulatory capital, resolution, subordination, systemic importance, TLAC, write down
