Total loss-absorbing capacity (TLAC) is a prudential standard developed by the Financial Stability Board (FSB) and endorsed by G20 leaders at the Antalya summit in November 2015. It targets global systemically important banks (G-SIBs) and aims to end the "too big to fail" problem exposed during the 2007–2009 financial crisis, when governments injected public funds to rescue collapsing megabanks.
The core idea is that a failing G-SIB should be resolvable through a bail-in: shareholders are wiped out and certain creditors are converted into equity, recapitalising the bank as a going concern or an orderly successor entity. To make this credible, the bank must maintain a sufficient stock of instruments that can legally and operationally absorb losses.
Key features of the FSB standard:
- Minimum ratio: at least 16% of risk-weighted assets (RWA) from 1 January 2019, rising to 18% of RWA from 1 January 2022, plus a leverage-ratio-based floor (6% then 6.75% of the Basel III leverage exposure measure).
- Eligible instruments: regulatory capital (CET1, Additional Tier 1, Tier 2) plus long-term unsecured subordinated debt that is contractually or structurally subordinated to operating liabilities such as deposits and derivatives.
- Scope: applies to resolution entities within each G-SIB group (external TLAC), with internal TLAC pre-positioned in material subsidiaries.
- Transitional easing was granted to G-SIBs headquartered in emerging markets, originally China.
TLAC has been implemented in national law through the EU's Banking Package (CRR2/BRRD2, 2019), the US Federal Reserve's TLAC rule for US G-SIBs and intermediate holding companies of foreign G-SIBs (final rule December 2016), Japan's FSA framework, and Switzerland's gone-concern requirements under FINMA. It sits alongside, but is distinct from, the EU's MREL (Minimum Requirement for own funds and Eligible Liabilities), which applies more broadly to EU banks.
Example
In 2023, when Credit Suisse was absorbed by UBS under FINMA supervision, the controversial write-down of roughly CHF 16 billion of Additional Tier 1 bonds illustrated how gone-concern loss-absorbing instruments within a TLAC-style framework can be used to recapitalise a failing G-SIB.
Frequently asked questions
Basel III sets going-concern capital ratios (CET1, AT1, Tier 2) to absorb losses while a bank operates. TLAC is a gone-concern standard: it adds a layer of bail-inable debt designed to recapitalise the bank during resolution, after capital has been exhausted.
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