The standard aims to reduce the risk of contagion within the financial system should a G-SIB enter resolution. It applies to both G-SIBs and non-G-SIBs. The main elements of the prudential treatment are as follows:
- Tier 2 deduction: banks must deduct holdings of TLAC instruments that are not already included in regulatory capital from their own Tier 2 capital.
- Threshold below which no deduction is required: the deduction is subject to the thresholds that apply to existing holdings of regulatory capital and an additional 5% threshold for non-regulatory-capital TLAC holdings only.
- Instruments ranking pari passu with subordinated forms of TLAC must also be deducted.
The standard also reflects changes to Basel III to specify how G-SIBs must take account of the TLAC requirement when calculating their regulatory capital buffers.
The standard will take effect at the same time as the minimum TLAC requirements for each G-SIB. These requirements are set out in the Financial Stability Board's TLAC standard for G-SIBs. They take effect on 1 January 2019 for most G-SIBs, but later for those whose headquarters are in emerging market economies.