On June 22, 2016, as part of his remarks at the Riksbank Macroprudential Conference in Stockholm, US Federal Reserve Board Vice Chairman Stanley Fischer responded to criticisms of the Dodd-Frank Act’s orderly liquidation authority and the Federal Reserve Board’s proposed total loss-absorbing capacity, or TLAC, requirement.
The proposed TLAC requirement mandates that systemically important firms maintain a minimum level of long-term, outstanding debt that could be used to absorb losses and recapitalize the firm in an orderly resolution under either the Bankruptcy Code or the orderly liquidation authority.
In his remarks, Fischer addressed the three most common criticisms of the TLAC proposal, starting with whether TLAC is a redundant backup OLA because the Bankruptcy Code provides an adequate framework for the resolution of any financial company. He also assessed whether OLA provides for a taxpayer bailout of systemically important funds through the orderly liquidation fund, concluding that it does not since OLA allows for liquidity support, and that any losses incurred by the fund would be covered by assessments imposed on large financial firms. Finally, he set forth reasons why TLAC requirements should not lead to GSIBs increasing their leverage and thereby their probability of failure.
Vice Chairman Fischer’s speech is available at: http://www.federalreserve.gov/newsevents/speech/fischer20160622a.pdf.