New rules for ‘too big to fail’ banks

Lesotho Times - - Business -

BASEL — Global reg­u­la­tors on Mon­day pro­posed new rules to en­sure that bank cred­i­tors rather than tax­pay­ers pick up the bill when a big lender col­lapses.

Mark Car­ney, chair­man of the Fi­nan­cial Sta­bil­ity Board and Bank of Eng­land gov­er­nor, said the plans marked a wa­ter­shed in end­ing banks that are too big to be al­lowed to fail.

“Once im­ple­mented, th­ese agree­ments will play im­por­tant roles in en­abling glob­ally sys­temic banks to be re­solved (wound down) with­out re­course to pub­lic sub­sidy and with­out dis­rup­tion to the wider fi­nan­cial sys­tem,” Car­ney said in a state­ment.

After the fi­nan­cial cri­sis in 2007-2009, gov­ern­ments had to spend bil­lions of dol­lars of tax­payer money to res­cue banks that ran into trou­ble and could have threat­ened global fi­nan­cial sys­tem if al­lowed to go un­der.

Since then, reg­u­la­tors from the Group of 20 economies have been try­ing to find ways to pre­vent this hap­pen­ing again.

The plans en­vis­age that global banks like Gold­man Sachs and HSBC should have a buf­fer of bonds or eq­uity equiv­a­lent to at least 16 to 20 per­cent of their risk-weighted as­sets, like loans, from Jan­uary 2019.

Th­ese bonds would be con­verted to eq­uity to help shore up a stricken bank. The banks’ to­tal buf­fer would in­clude the min­i­mum manda­tory core cap­i­tal re­quire­ments banks must al­ready hold to bol­ster their de­fences against fu­ture crises.

The new rule will ap­ply to 30 banks the reg­u­la­tors have deemed to be glob­ally “sys­tem­i­cally im­por­tant,” though ini­tially three from China on that list of 30 would be ex­empt.

G2O lead­ers are ex­pected to back the pro­posal later this week in Aus­tralia. It is be­ing put out to pub­lic con­sul­ta­tion un­til 2 Fe­bru­ary 2015.

Car­ney was con­fi­dent the new rule would be ap­plied as cen­tral banks and gov­ern­ments had a hand in draft­ing them.

“This isn’t some­thing that we cooked up in Basel tower and are just pre­sent­ing to every­body,” he told a news con­fer­ence, re­fer­ring to the FSB’S head­quar­ters in Switzer­land.

Breaches should be pun­ished by curb­ing div­i­dends and bonuses, the FSB said.

Most of the banks would need to sell more bonds to com­ply with the new rules, the FSB said. Some bonds - known as “se­nior debt” that banks have al­ready sold to in­vestors would need re­struc­tur­ing.

Se­nior debt was largely pro­tected dur­ing the fi­nan­cial cri­sis, which meant in­vestors did not lose their money.

But Car­ney said it in fu­ture th­ese bonds might have to bear losses if al­lowed un­der na­tional rules and in­vestors were warned in ad­vance.

The new buf­fer, for­mally known as to­tal loss ab­sorb­ing ca­pac­ity or TLAC, must be at least twice a bank’s lever­age ra­tio, a sep­a­rate mea­sure of cap­i­tal to to­tal as­sets re­gard­less of the level of risk.

— Reuters

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