Technical change would make limitations under TLAC rule more gradual

Any automatic limitations on capital distributions that could apply under the Federal Reserve’s “total loss-absorbing capacity” (TLAC) rule would be more gradual under a definition issued as a technical change Monday by the Federal Reserve.

The Fed said the change would allow banks to continue lending to creditworthy households and businesses. Issued as an interim final rule, the change will phase in gradually, as intended, the automatic restrictions associated a banking firm’s TLAC buffer requirements, if the levels decline, the agency said.

TLAC is an additional cushion of capital and long-term debt that can be used to recapitalize a bank if it is in distress, the Fed noted. It was made final by the Fed in 2016 to require the largest domestic and foreign banking organizations operating in the United States to maintain a minimum amount of TLAC, consisting of a minimum amount of long-term debt (LTD) and tier 1 capital.

The rule applies to the largest and most systemically important U.S. banking organizations (U.S. GSIBs) and the U.S. operations of the largest and most systemically important foreign banking organizations (covered IHCs) because “the failure or material financial distress of these companies has the greatest potential to disrupt U.S. financial stability,” the Fed said.

The definition change, the Fed added, will facilitate the use of banking firms’ buffers to promote lending activity to households and businesses.

“Over the past decade, U.S. banks of all sizes have built up substantial levels of capital and liquidity in excess of their minimum requirements,” the Fed said in a statement. It noted that the definition change mirrors an interim final rule announced last week by the bank regulatory agencies that applies to a firm’s capital levels.

The interim final rule takes effect as soon as it is published in the Federal Register.

Federal Reserve Board announces technical change to support the U.S. economy and allow banks to continue lending to creditworthy households and businesses