Global banks’ internal distribution of bail-in debt for crises raises allocation issues, Financial Stability Board says

14 October 2020 16:54 by Neil Roland

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Global banks’ internal distribution of bail-in debt to be used to unwind crippled firms has raised allocation issues that call for regulators' attention, the Financial Stability Board said.

Regulators in banks’ home countries should consider the proper balance between positioning firms’ bail-in bonds, or total loss-absorbing capacity (TLAC), and the discretionary resources banks might need during stress, the FSB said. This calibrated balance also should take into account the desire for certainty among host countries where global banks’ subsidiaries are located, said the report today to the Group of 20 economic powers.

“A certain level of pre-positioned resources is a core component of a credible resolution strategy,” the report said. “It moreover hard-wires cooperation in stress, serving as a coordination device to help diminish host authorities’ incentive to ring-fence assets in resolution.”

A survey this year of cooperation among global banks’ home countries and their subsidiaries’ host jurisdictions found questionable balances in allocations of TLAC, or long-term debt that can be converted to equity in a new firm if the old one collapses.

Basel-based FSB will meet next month with regulators around the world to discuss, in part, what can be done to prevent host countries from “ring-fencing,” or segregating, bail-in debt and other resources from global banks’ units in a crisis.

The meeting, the report said, also will address crisis preparedness under various scenarios and try to foster cross-border cooperation to help resolve differences.

The board said it also plans to issue a report next month evaluating the availability of unallocated TLAC that can be used at banks’ discretion. A 2015 agreement required banks to hold minimum amounts of TLAC.

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