Will TLAC regulations fix the G-SIB too-big-to-fail problem?

•Financial Stability Board's Minimum TLAC regulations will not accomplish their goals.•TLAC rules must require TLAC at all bank subsidiaries.•TLAC rules must include restrictions on how TLAC funds are used.•An equivalent, but simpler approach, is abandon TLAC and raise regulatory capital requirements on G-SIB subsidiary banks.

The efficacy of the Financial Stability Board's proposed requirement for minimum “total loss absorbing capacity” (TLAC) at global systemically important banks (G-SIBs) is assessed using a stylized model of a bank holding company and an equilibrium asset pricing model to value financial claims. I identify a number of G-SIB strategies that satisfy minimum TLAC requirements but fail to reduce implicit safety net subsidies that accrue to G-SIB shareholders or increase the resources available to recapitalize a failing G-SIB subsidiary. To meet the FSB's stated goals, TLAC requirements must impose minimum TLAC at all subsidiaries and restrict how TLAC funds can be invested. An equivalent, but much simpler solution is to significantly increase regulatory capital requirements on systemically important bank subsidiaries.