It was felt that extending implementation to 2022 provided sufficient time for firms to reissue maturing debt as TLAC or complete any additional issuance in a way that minimises any impact on the cost of funding or the supply of credit to the real economy. Turning to the quality of TLAC, the principles covering the Term Sheet set out: the need for bail-in to be legally enforceable on TLAC; that bail-in should not give rise to systemic risk; that TLAC instruments should be stable, long-term claims; and that holders should have clarity on the order in which they would incur losses. Taken together, these principles underscore the importance of subordination of TLAC to operating liabilities. Subordination provides clarity to investors and avoids bail-in being complicated or inhibited by compensation claims that arise if creditors are treated less favourably than in insolvency. This need to ensure that the bail-in of TLAC instruments is credible as well as feasible was reflected too in the provisions in the final Term Sheet for a 5% limit on liabilities that could sit pari passu with TLAC and for exclusion of structured notes. Making TLAC consistent with bail-in also led to clarification in the Term Sheet that after 2022 all TLAC should be issued out of resolution entities: debt issued out of SPVs and, in groups subject to SPE strategies, Tier 2 subordinated debt issued to the market out of operating companies will no longer count as TLAC.
They put the emphasis on self-insurance, or firms having adequate liquid resources and the internal infrastructure to identify needs and mobilise collateral, to be able to see them through the resolution process. But they also describe a potential role for credible public backstops to instil confidence and manage the perception that the firm cannot self-insure. A backstop for funding in resolution is likely to be separate from ordinary central bank facilities. But that should not necessarily mean that the bank in resolution is cut off at the central bank. To some extent the same principle that we want to apply to other market participants in dealing with a bank in resolution should apply also to central banks – that is, if the bank remains authorised and continues to perform, it should have continuity. As long as a bank in resolution continues to meet the eligibility criteria applied to other banks, it should not, as a general rule, be excluded from central bank operations. The adequacy of a G-SIB’s liquid resources through resolution is part of the resolution planning discussion in CMGs. In a cross-border setting, coordination around resources and availability of backstops will depend on the resolution strategy – in an MPE strategy responsibilities will sit locally with the authorities of each resolution entity; in an SPE strategy the home authority will need to play a stronger coordinating role. But this discussion will stand on the firm foundation provided by TLAC.