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Will TLAC regulations fix the G-SIB too-big-to-fail problem?

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  • Kupiec, Paul H.

Abstract

The efficacy of the Financial Stability Board's proposed requirement for minimum “total loss absorbing capacity” (TLAC) at global systemically important banks (G-SIBs) is assessed using a stylized model of a bank holding company and an equilibrium asset pricing model to value financial claims. I identify a number of G-SIB strategies that satisfy minimum TLAC requirements but fail to reduce implicit safety net subsidies that accrue to G-SIB shareholders or increase the resources available to recapitalize a failing G-SIB subsidiary. To meet the FSB's stated goals, TLAC requirements must impose minimum TLAC at all subsidiaries and restrict how TLAC funds can be invested. An equivalent, but much simpler solution is to significantly increase regulatory capital requirements on systemically important bank subsidiaries.

Suggested Citation

  • Kupiec, Paul H., 2016. "Will TLAC regulations fix the G-SIB too-big-to-fail problem?," Journal of Financial Stability, Elsevier, vol. 24(C), pages 158-169.
    • Handle: RePEc:eee:finsta:v:24:y:2016:i:c:p:158-169
    DOI: 10.1016/j.jfs.2016.04.009
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    1. Kupiec, Paul & Wallison, Peter, 2015. "Can the “Single Point of Entry” strategy be used to recapitalize a systemically important failing bank?," Journal of Financial Stability, Elsevier, vol. 20(C), pages 184-197.
    2. Christopher L. Culp, 2009. "Contingent Capital vs. Contingent Reverse Convertibles for Banks and Insurance Companies," Journal of Applied Corporate Finance, Morgan Stanley, vol. 21(4), pages 17-27, September.
    3. Stefan Avdjiev & Anastasia Kartasheva & Bilyana Bogdanova, 2013. "CoCos: a primer," BIS Quarterly Review, Bank for International Settlements, September.
    4. Paul H. Kupiec, 2015. "Is Dodd Frank orderly liquidation authority necessary to fix too-big-to-fail?," AEI Economics Working Papers 862164, American Enterprise Institute.
    5. Charles W. Calomiris & Richard J. Herring, 2013. "How to Design a Contingent Convertible Debt Requirement That Helps Solve Our Too-Big-to-Fail Problem," Journal of Applied Corporate Finance, Morgan Stanley, vol. 25(2), pages 39-62, June.
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    Cited by:

    1. Homma, Yasutake & Suzuki, Katsushi, 2023. "TLAC bonds and bank risk-taking," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 87(C).
    2. Chao, Xiangrui & Ran, Qin & Chen, Jia & Li, Tie & Qian, Qian & Ergu, Daji, 2022. "Regulatory technology (Reg-Tech) in financial stability supervision: Taxonomy, key methods, applications and future directions," International Review of Financial Analysis, Elsevier, vol. 80(C).
    3. Lele Zhou & Maowei Chen & Hyangsook Lee, 2022. "Supply Chain Finance: A Research Review and Prospects Based on a Systematic Literature Analysis from a Financial Ecology Perspective," Sustainability, MDPI, vol. 14(21), pages 1-27, November.
    4. Kund, Arndt-Gerrit & Hertrampf, Patrick & Neitzert, Florian, 2023. "Bail-in requirements and CoCo bond issuance," Finance Research Letters, Elsevier, vol. 53(C).
    5. Thomas Conlon & John Cotter, 2019. "Subordinate Resolution ‐‐ An Empirical Analysis of European Union Subsidiary Banks," Journal of Common Market Studies, Wiley Blackwell, vol. 57(4), pages 857-876, July.
    6. Díaz, Fernando & Ramírez, Gabriel G. & Liu, Liuling, 2018. "Corporate bond clawbacks as contingent capital for banks," Journal of Financial Stability, Elsevier, vol. 37(C), pages 11-24.
    7. Gündüz, Yalin, 2020. "The market impact of systemic risk capital surcharges," Discussion Papers 09/2020, Deutsche Bundesbank.
    8. G. Gospodarchuk G. & Г. Господарчук Г., 2019. "Резервный буфер капитала как инструмент макропруденциальной политики // Reserve Capital buffer as an Instrument of Macroprudential Policy," Финансы: теория и практика/Finance: Theory and Practice // Finance: Theory and Practice, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, vol. 23(4), pages 43-56.
    9. Michel Crouhy & Dan Galai, 2018. "Are Banks Special?," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 8(04), pages 1-19, December.
    10. José Alejandro Fernández Fernández, 2020. "Considerations of the SPE and MPE resolution," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(3), pages 278-287, September.

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    More about this item

    Keywords

    TLAC [total loss absorbing capacity]; G-SIBs [global systemically important banks]; Bail-in capital; SPOE [single point of entry strategy];
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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