The Federal Reserve Board’s proposed TLAC rule creates a regulatory “slush fund” for recapitalizing a GSIB’s failing systemically important bank subsidiaries. TLAC presumes that a Title II resolution can be used to keep a GSIB’s critical subsidiaries open and operating, but there are scenarios in which a Title II resolution cannot be authorized. Indeed the “clean” parent holding company requirements in the TLAC proposal make it less likely that a GSIB parent company would be in danger of default if a critical operating subsidiary failed. If TLAC works as planned, it will extend new government guarantees on nearly $5 trillion in GSIB subsidiary liabilities that are not currently protected by Federal deposit insurance. The presumption that the losses associated with these new guarantees will be paid for by TLAC investors assumes that a Title II resolution is always an option. If Title II is not available, the government must either renege on these guarantees or call on taxpayers for the resources to honor them. Finally, since there is no requirement on the holding company’s use of TLAC funds, there is no guarantee that TLAC will remove or even limit the TBTF interest rate subsidy currently enjoyed by the largest financial institutions.
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