Economic Commentary: TLAC and Swedish banks


In the aftermath of the financial crisis, global financial regulators have taken measures to avoid public money being used to save large, troubled banks in the future, i.e. to end the too-big-to-fail problem. In contrast to the public “bail-outs” of banks, the new regime foresees a “bail-in” of failing banks. That is, the losses are absorbed by the bank´s shareholders and creditors, instead of taxpayers. The regulation on Total Loss Absorbing Capacity, TLAC, aims to ensure that the global systemically important banks have sufficient amounts of capital and debt instruments available that can be “bailed-in” (written down or converted into equity to absorb losses and recapitalise).

In this Economic Commentary, the authors explain what the TLAC entails and its proposed use in a bank resolution. If the TLAC standard became binding today and were applied to all major Swedish banks, the Riksbank´s calculations show that the banks would need to raise their loss-absorbing capacity from current levels to comply with the requirement. However, even with conservative assumptions regarding which of the banks' instruments are TLAC eligible, it seems feasible for the banks to take action to comply with the requirement before it becomes binding in 2019.

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