The Bank of Montreal (BMO) has issued C$13 billion ($9.8 billion) of bail-in debt year-to-date in a bid to meet its total loss-absorbing capacity (TLAC) requirement ahead of a 2021 deadline.

Total TLAC, made up of eligible regulatory capital and unsecured debt that can be written off in a solvency crisis, hit C$60.7 billion at end-July, up 9.6% on end-April and 33.5% on end-January.

The increase has been achieved largely through the sale of TLAC-eligible debt instruments. As of end-July, these made up 21.4% of total TLAC, up from just 1.6% six months prior. BMO had C$706 million of bail-in debt outstanding the first quarter of the year, issued an additional C$8.5 billion in the second and C$3.8 billion in the third.

The debt selling spree has lifted the bank’s ratio of TLAC to risk-weighted assets (RWAs) to 19.4%, from 15.3% at end-January. The bank must achieve a TLAC ratio of 23.5% by November 1, 2021. This includes a 2% buffer for being designated a domestic systemically important bank.

What is it?

The Canadian federal watchdog, the Office of the Superintendent of Financial Institutions, implemented guidelines on TLAC on September 23, 2018. The framework requires banks to meet bail-in debt and capital targets by November 1, 2021.

Why it matters

BMO has made great strides towards its TLAC target, but needs to find an additional C$12.8 billion over the next two years to seal the deal. This shortfall will likely be met by replacing legacy unsecured debt with TLAC-eligible instruments. As of end-April, the Canadian bank had total debt expiring within one year equal to 3.5% of RWAs, and that with maturities beyond this horizon equivalent to 15%.

This means the bank will not have to grow its debt pile any higher, though the new bonds may cost it more to compensate investors for the risks they will be bailed in if disaster strikes.

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TLAC-eligible debt is a regulatory favourite, but loads risks onto bondholders. Are investors being properly compensated for the risks of bail-in? Have your say by emailing louie.woodall@infopro-digital, or sending a tweet to @LouieWoodall or @RiskQuantum. You can also get in touch via LinkedIn.

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