EU banks with a 17.7% sector gross TLAC look more challenged than U.S. banks and Japanese banks, notes Credit Suisse.
Jan Wolter and team at Credit Suisse in their February 25, 2015 research report titled: “TLAC-Towards a Global Resolution Regime” points out that the FSB’s proposed TLAC terms could create a disadvantage for G-SIBs versus non-G-SIBs.
FSB’s TLAC proposal
The Credit Suisse team points out that the Financial Stability Board (FSB)’s Total Loss Absorbing Capital (TLAC) term sheet issued in November gives investors more clarity on the total capital hurdle for a G-SIB. The following table summarizes TLAC term sheet:
The analysts note the proposal’s aim is to end the concept of ‘Too-Big-To-Fail‘ and requires a G-SIB to hold 16-20% of Risk Weighted Assets in TLAC, equal to a full 20.5-26%, including Basel 3 Capital buffers, and a 1% management buffer:
The CS analysts computed TLAC levels and issuance need under different scenarios, covering 31 out of the 33 global G-SIBs, with a total EUR 36 trillion of assets. Their analysis encompasses about 40% of global bank assets.
As captured in the following graph, Wolter et al. note EU banks with 17.7% gross TLAC look more challenged than U.S. Banks with 23.5% and Japanese banks with 20.5% TLAC.
Only a minor portion (2.5% of RWAs) of EU banks senior debt qualifies as TLAC, while for U.S. banks, they anticipate about 50% of the TLAC is met with inexpensive Holding Company senior debt. As highlighted in the following graph, the analysts note the TLAC terms are still being negotiated and they believe the most market-friendly outcome would be, for EU banks in particular, a revision of the 2.5% senior debt carve out:
Concessions for some regions
The Credit Suisse analysts point out that emerging market banks are initially exempt from the TLAC, which is a concession to China, while the inclusion of a Resolution Fund at 2.5% RWA of the TLAC appears to be a concession to Japan. The analysts believe the 2.5% of RWA in senior debt allowed in the TLAC proposal, despite lacking contractual / structural subordination, looks like a concession to the EU.
The report notes global regimes and CET1 hurdles differ widely and a level playing field looks unlikely.
The CSanalysts point out that national ‘gold plating’ and widely different TLAC levels could distort competition. They note stricter rules on complex banks (G-SIBs) create an uneven playing field against local non-G-SIBs. The analysts note the TLAC regime benefits banks with legacy Holding Companies, such as US G-SIBs, which they believe enjoy a 30-40 bp funding advantage against Operating Company banks. Wolter and colleagues also highlight that each 10 bp of lower funding cost could equal about 70-80 bp higher ROE, or if the benefit is passed on to clients, could drive market share gains.
The Credit Suisse team favors names less challenged by TLAC. In the US, they prefer Goldman Sachs and Bank of America, while in Japan, they prefer Sumitomo Mitsui Financial. The following table depicts their valuation of global banks: