Three systemic banks are currently €29.8 billion ($31.6 billion) short of the minimum total loss-absorbing capacity (TLAC) requirements they need to comply with Basel III on a fully loaded basis from 2028 onwards, analysis by the Basel Committee on Banking Supervision shows.

Based on end-June 2022 data, the study involved 25 of the 30 global systemically important banks. The aggregate TLAC shortfall was €5.3 billion smaller than under the initial Basel III reforms, but almost four times larger compared with figures from the end-December 2021 reporting period.

Applying the 2022 TLAC minimum requirements to the initial Basel III framework, one G-Sib in the sample reported a shortfall equivalent to 6.4% of its risk-weighted assets; another accrued a deficiency of 2.1%, while the third had a shortfall of less than 0.1%.

What is it?

The Basel III monitoring report, issued semi-annually by the BCBS, collates data on the capital, liquidity and leverage ratio metrics of banks in member countries, based on a representative sample of institutions in each jurisdiction.

The latest report, based on end-June 2022, covers 181 banks. These include 114 large internationally active banks, 30 of which are G-Sibs, and 66 smaller banks.

The TLAC analysis involved 25 reporting G-Sibs and the re-inclusion of temporary leverage ratio exemptions.

TLAC, a concept designed by the Financial Stability Board and finalised in November 2015, is intended to prevent taxpayer bailouts of imploding systemic banks by forcing them to maintain a fixed ratio of bail-in debt and capital to risk-weighted assets and total leverage exposures.

As of January 2022, the minimum TLAC requirements rose from 16% of RWAs or 6% of leverage exposure to 18% and 6.75%, respectively.

Why it matters

One explanation for the significant TLAC shortfall highlighted in the latest monitoring report can be found by taking into account that exempted leverage ratio exposures were added back to the exposure measure by the BCBS, resulting in higher leverage ratio requirements for the banks.

Technicalities aside, the fact that only three systemic banks reported a deficit with five years to go before Basel III is fully implemented will be seen as decent progress by regulators worldwide. The not-so-good news is the price these laggards will likely incur to close the gap.

As interest rates climb and the cost of funding rises, issuing more bail-in bonds might not look as appealing as it did no later than a year ago. The remaining options on the table include cut dividend payouts or slash their balance sheets.

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