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Quarles, Randal on 2018 May 15

I believe we should consider whether the internal TLAC calibration for IHCs could be adjusted to reflect the practice of other regulators without adversely affecting resolvability and U.S. financial stability. The current calibration is at the top end of the scale set forth by the FSB, and willingness by the United States to reconsider its calibration may prompt other jurisdictions to do the same...

The single-point-of-entry (SPOE) and bail-in concepts hold particular promise for most large global firms. However, a successful SPOE resolution of a large global firm has not yet been attempted and will require close cooperation among a large number of stakeholders, including both home and host country regulators. This cooperation will be based on an understanding of separate and mutual interests, not on trust alone. So while SPOE creates a potentially workable framework for resolution, setting the conditions for cooperation is critical. I grew up among the ranches of the American West, where we lived by the motto taught to me as a young child: trust everyone, but brand your cattle. This is a theme that will run throughout my remarks today. ... Regarding liquidity, the Board and FDIC expect a U.S. G-SIB to appropriately estimate and maintain sufficient liquidity for material entities, an expectation known as Resolution Liquidity Adequacy and Positioning, or RLAP.4 RLAP expectations are intended to be designed so that liquidity is not "double counted" among home and host jurisdictions, to provide transparency into the location of liquidity across the firm's material entities, and to ensure that liquidity can flow where needed with minimal potential disruption. The RLAP approach is aimed at ensuring that surpluses in one host jurisdiction generally are not relied upon to meet deficits in another host jurisdiction, given the confusion and vulnerabilities such reliance can cause in an actual stress. Specifically, a firm should be able to measure the stand-alone liquidity position of each material entity and ensure that liquidity is readily available either at the parent or at that entity to meet any deficits.5 As with capital, firms are expected to have a balance of prepositioned and centrally managed liquidity--specifically, by balancing the certainty associated with holding liquidity directly at material entities against the flexibility provided by holding high-quality liquid assets at the parent available to meet unanticipated outflows at material entities. ... For IHCs that are subsidiaries of foreign-owned G-SIBs, the Federal Reserve requires such a firm to issue a minimum amount of loss-absorbing instruments to its foreign parent, known as internal TLAC, including a minimum amount of unsecured long-term debt.6 In the event that an IHC was experiencing significant financial distress, the internal TLAC could be used to replenish the IHC's equity and maintain its solvency. The U.S. implementation of internal TLAC is modeled on the internal TLAC framework developed by the Financial Stability Board (FSB), which includes a calibration of the amount of loss-absorbing resources that should be prepositioned in a given jurisdiction.7 Specifically, the FSB contemplates that internal TLAC requirements of a subsidiary of a foreign bank expected to be resolved through SPOE would be calibrated at 75 to 90 percent of the external TLAC requirement that would apply to the subsidiary if it were to be separately resolved. In implementing the TLAC standards in the United States, the Board calibrated the internal TLAC requirement for IHCs of foreign-owned G-SIBs at the high end of the FSB range, at around 90 percent. ... There are two principal points I have been making today. The first is that some amount of local capital and liquidity prepositioning can reduce the incentives for damaging and unpredictable seizures of resources by local regulators during times of stress--thus actually reducing the likelihood that improvised, beggar-thy-neighbor ring-fencing would frustrate completion of a successful SPOE resolution in the future. As we learned long ago out West, the branding of cattle creates the possibility of trust. The second point, however, is equally important: the best prepositioning structure is not an eternal verity mathematically deducible from first principles, but it is instead a practical balance designed to promote cooperation among humans, and any such balance is likely to be improvable with experience, reflection, and debate... There are two principal points I have been making today. The first is that some amount of local capital and liquidity prepositioning can reduce the incentives for damaging and unpredictable seizures of resources by local regulators during times of stress--thus actually reducing the likelihood that improvised, beggar-thy-neighbor ring-fencing would frustrate completion of a successful SPOE resolution in the future. As we learned long ago out West, the branding of cattle creates the possibility of trust. The second point, however, is equally important: the best prepositioning structure is not an eternal verity mathematically deducible from first principles, but it is instead a practical balance designed to promote cooperation among humans, and any such balance is likely to be improvable with experience, reflection, and debate... We continue to believe that the IHC and attendant requirements are appropriate for foreign banks with large U.S. operations. However, in light of our experience with these structures, I believe we should consider whether the internal TLAC calibration for IHCs could be adjusted to reflect the practice of other regulators without adversely affecting resolvability and U.S. financial stability. The current calibration is at the top end of the scale set forth by the FSB, and willingness by the United States to reconsider its calibration may prompt other jurisdictions to do the same, which could better the prospects of successful resolution for both foreign G-SIBs operating in the United States, and for U.S. G-SIBs operating abroad. Alternatively, it may be possible to streamline the elements of our resolution loss absorbency regime, which include both TLAC and long-term debt requirements. I will be recommending to my colleagues that we look closely at these possibilities in the coming weeks and seek comment on ways to further improve this framework. Quarles, Randal

Harvard Law School

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