TLAC scratching

Bank watchdogs tie themselves in knots over TLAC

Global bank supervisors are tying themselves in knots over TLAC. This ugly acronym - short for total loss-absorbing capacity - is supposed to mean regulators ensure creditors pay for cross-border bank busts. The emerging rules look set to be watered down for banks like HSBC, to make sure they aren't disadvantaged against their less-sprawling rivals. But what's being proposed will make the final system even more prone to political stand-offs.

Simply put, banks with lots of cross-border operations either run everything off one balance sheet - like Credit Suisse - or trap capital and liquidity in countries where they operate - like HSBC or Santander. The Financial Stability Board has given banks two options. They can hold bonds that would turn to equity in a crisis at the holding company level, or at the level of each major geographical subsidiary.

This gives the likes of HSBC a raw deal. If dollops of TLAC are trapped in each jurisdiction, the overall amount the bank ends up holding could be bigger than if it were more Credit Suisse-shaped. This is especially galling for HSBC-style deposit-heavy institutions, who already consider themselves to be less risky than their market-funded peers.

The workaround suggested in a new draft dated August 24 addresses this problem, but adds a new one. A bank like HSBC can offset excess capital in one place against too little in another. Yet this means regulators in all the locales where HSBC operates will have to agree which of them should be more exposed to the bank being caught short if a disaster occurs. For a bank with dozens of distinct capital-holding entities, this will be a political bunfight.

Even the single balance sheet approach has a problem. Wary national regulators have successfully lobbied for the right to trap 60 per cent to 75 per cent of a bank's national TLAC requirement in their borders, to ensure that it is available to meet needs in a disaster. This addresses a basic fact: regulators don't trust each other. Unfortunate, then, that the latest tweak to bank capital rules relies even more critically on them playing nicely together.