One of the amazing things that has happened in the wake of the financial crisis is that international bank regulators have moved from measuring two things - capital adequacy and the leverage ratio of banks - to measuring a lot of different things which must be computationally hard to keep in balance. In addition to the two extant measures, banks have to establish a net stabled funding ratio (NSF) designed to deal with long term assets, a liquidity coverage ratio (LCR) designed to deal with short term assets, and let's not forget the work being done in the US by the stress tests, labelled DFAST and CCAR, or Europe's MiFID.
Into the mix the Financial Stability Board has added a total loss absorbing capacity rule, or TLAC. The best way to think of this rule is as an alternative measure of the capital adequacy of very big banks, with an eye to the moment of failure; it requires banks, in addition to holding common stock and cash, to hold financial instruments like convertible bonds (or maybe plain old unsecured debt) that can be used to bail-in the bank - bail-in means that the bank looks to its creditors to provide it with resources to stabilize it, bailout means it looks to the government to provide those resources. Or, if you like, here's the FSB:
G-SIBs will be required to meet the TLAC requirement alongside the minimum regulatory requirements set out in the Basel III framework. Specifically, they will be required to meet a Minimum TLAC requirement of at least 16% of the resolution group’s risk-weighted assets (TLAC RWA Minimum) as from 1 January 2019 and at least 18% as from 1 January 2022. Minimum TLAC must also be at least 6% of the Basel III leverage ratio denominator (TLAC Leverage Ratio Exposure (LRE) Minimum) as from 1 January 2019, and at least 6.75% as from 1 January 2022.
Without going too far down this road, I think that these varied sorts of capital measurement are basically supposed to discourage regulatory arbitrage, though it also suggests how puissant big banks must be in handling their regulatory requirements. Not a place for a financial startup. TLAC is also a tax on big banks, of course, and a disincentive to become one of the thirty largest institutions in the world. Here's the WSJ with an explainer.
This all has to be adopted by the G20 at its next meeting, proving once again that in finance, the rules that really matter are set by an international, non-treaty based form of administration.
Administrative Law, Finance, Financial Crisis, Financial Institutions | Bookmark

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