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Recognizing that the FSB can only provide guidance, and respecting the legitimate concerns of hosts, nonetheless the draft Guidance appears in some areas to provide insufficient emphasis on the group resolution plan agreed through CMGs. The industry would like to see more balance to provide guidance emphasizing a cooperative, group approach to resolution agreed in CMGs and led by home authorities. This in turn would advance the purposes of the FSB’s approach to effective, efficient cross-border resolution, reducing the risk of local ring-fencing, fragmentation of approaches, and misallocation of resources as a result of the accretion of unnecessary levels of internal TLAC.
The final Guidance should increase its focus on supporting firms’ recovery and resolution strategies, which are now quite robust after lengthy work, debate and review. This applies equally to the SPE approach to recovery and resolution, where the structure aims at assuring strong group resolution from the top, and to MPE groups, which have been building strong and coherent resolution-entity structures. Section 18 of the Term Sheet includes a statement that internal TLAC should be “distributed as necessary within resolution groups in proportion to the size and risk of exposures of its material sub-groups.”
This is an appropriate principle to support group integrity and effective resolution, and will ultimately be better in supporting host interests than if hosts appropriate disproportionate internal TLAC for their own entities. For this reason, it would be helpful if the guidance were focused on more collaborative, home-led structures, with guidance aiming at incentivizing cooperative behavior among all relevant authorities, to support the best result for all, avoiding unhelpful competition for resources at any stage.
CMGs should avoid local requirements for excessive downstreaming of resources, which could lead to loss of internal flexibility and misallocation risk, as discussed herein. At the least, the final Guidance might enter into more detail about policies and procedures for home/host consultation and use of CMGs to assure coherence of setting internal TLAC. The goal should be to assure that there is appropriate focus on the broader question of what degree of protection for hosts is appropriate, and how to achieve it in ways that make sense overall. Such a focus should, in turn, aim to avoid the detrimental effects of excessive internal TLAC structures that would work against FSB cross-border objectives. This should be agreed through the CMGs rather than by host authorities’ ultimately determining internal TLAC requirements, albeit in consultation with home authorities.
But the draft Guidance in its current form might be misinterpreted in a way that would lead to fragmentation and inefficient use of global resources. FSB guidance on a cooperative group approach focused on the group’s resolution strategy would help mitigate this misinterpretation risk. The focus in the current draft on a leading role for hosts may lead to the problems of Superequivalence, misallocation risk, and imperfect balance between home and host concerns, as discussed below.
The final Guidance should acknowledge that resolution planning has evolved since the FSB Term Sheet provisions on internal TLAC were finalized in November 2015 and that the internal TLAC guidance should be implemented in a manner that provides flexibility to authorities and firms as those standards continue to evolve and encourages coordination and cooperation among home and hosts. In short, the final Guidance would be much more useful, and more consistent with the FSB’s good work to date, if it would give greater emphasis to the concept of internal TLAC (which is to say, group funding structures) as part of the overall, cooperative resolution planning process.
The final Guidance in sum could do more to promote cooperative effort of home and host authorities in order to assure coherent, effective use of group resources in resolution. This can be achieved through a number of clarifications. Furthermore, the final Guidance would be more helpful to all concerned if it provided for a greater role of the firm in determining the appropriate amount of internal TLAC for its resolution groups by providing its own assessment and commenting upon regulatory evaluation of internal TLAC or other issues raised, to be sure that all facts and circumstances are fully taken into account by the authorities in making decisions.