It is in the public interest to increase the resiliency of the largest financial institutions to prevent the need for future taxpayer assistance to forestall a more serious financial crisis. However, the proposed TLAC regulation is not the best way to accomplish this goal. TLAC will not remove the risk that the largest financial institutions may require future taxpayer assistance should the country face another financial crisis. In fact, the uncertainties associated with using TLAC in a Dodd-Frank Title II resolution are likely to create a new important source of systemic risk — uncertainty about which investors bear losses in a GSIB resolution — a risk that did not exist in the prior financial crisis.
Moreover, the language of the proposed TLAC rule promises new protections to a huge volume of outstanding GSIB operating subsidiary liabilities. These new protections will provide tangible too-big-to-fail (TBTF) benefits to eight GSIBs that are not accessible to smaller institutions that are not eligible for a TLAC-Title II resolution. As a result, TLAC will not end TBTF, but instead will ensure that the largest financial institutions continue to benefit from a funding cost advantage created by their GSIB status as the TLAC plan makes it clear that regulators intend to preserve GSIB subsidiary institutions intact while smaller institutions will continue to fail and be liquidated under deposit insurance resolution rules.
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