TLAC

TLAC, or Total Loss-Absorbing Capacity, is a regulatory standard for global systemically important banks (G-SIBs) intended to ensure that these banks hold sufficient loss-absorbing and recapitalization resources to absorb losses and support an orderly resolution while continuing to provide critical functions. The aim is to enable resolvability without relying on public funds.

The framework requires banks to hold external loss-absorbing resources that can be bailed in or written down in a resolution. Eligible instruments typically include certain equity components and long-term debt that can be converted to equity or written down if a bank fails. The amount is usually expressed as a ratio relative to risk-weighted assets or to total liabilities and own funds, and the applicable thresholds are implemented on a phased-in basis that varies by jurisdiction.

Origins and scope: TLAC was developed by the Financial Stability Board and the Basel Committee on Banking Supervision in the early 2010s as part of the broad Basel III reforms. It has since been implemented in various regional frameworks, most notably in the European Union through the MREL regime, which sets national requirements for the instruments a bank must hold to facilitate resolution. TLAC and MREL together seek to ensure that banks can be resolved using private resources rather than taxpayer funds.

Impact and status: Banks subject to TLAC have been gradually building buffers, with thresholds and timelines differing by jurisdiction. TLAC remains a central element of modern resolvability planning and is complemented by other financial regulation aimed at reducing systemic risk.