We fully understand the FSB’s concerns on contagion risk that may stem from investment in TLAC instruments, and we support the idea for regulators to strongly disincentivise internationally active systemic banks from holding TLAC issued by other G-SIBs.
However, due to the BCBS proposed approach (deduction of TLAC-Holdings from Tier 2 for all banks), the main share of the instruments to be issued as TLAC eligible debt will have to be held by non-banking actors. This contraction of the investors’ base will lead to higher cost for G-SIBs’ senior unsecured debt and as a consequence will reduce the capacity of the banking sector to finance the economy. It will also concentrate the holdings of G-SIBs senior unsecured debt instruments in the hands of non-regulated financial actors such as hedge funds or pension funds, which seems contrary to the pristine goal of mitigating contagion risk.
Thus, we believe that the Committee should take into account a solution within the large exposure regime.
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