LONDON: Global regulators set out their “final tools” on Monday for ending the phenomenon of “too big to fail” banks, seeking to draw a line under a period of intensive rule making after a financial crisis that tarnished the sector and weighed heavily on taxpayers.
Mark Carney, chairman of the Financial Stability Board (FSB) that coordinates regulation across the Group of 20 economies (G20) to plug gaps highlighted by the 2007-09 financial crisis, said many of the key reforms have been implemented decisively and promptly.
“As a consequence, the financing capacity to the real economy is being rebuilt and significant retrenchment from international activity has been avoided,” Carney said in a letter to G20 leaders ahead of their summit next week.
The G20 tasked the FSB in 2009 with introducing a welter of reforms from increasing bank capital requirements to shining a light on derivatives markets and curbing bankers’ bonuses.
Carney, who is also Governor of the Bank of England, said the board has now finalised the tools needed to wind down “too big to fail” banks in an orderly way if necessary, seen as the last major financial reform of the crisis.
G20 leaders meeting next week in Turkey will be asked to endorse a reform that requires the world’s 30 top banks to issue a buffer of bonds by 2022 that can be written down to raise funds equivalent to 18 per cent of risk-weighted assets, if the lender goes bust.
The aim of the buffer, known as total loss-absorbing capacity or TLAC, is to allow a big bank to fail without creating the kind of mayhem in markets seen after Lehman Brothers bank went bust in 2008.
Under the worst case scenario, the banks would have to issue a total of 1.1 trillion euros ($1.18tr) in bonds. The bulk of this, or 755 billion euros, would be in China and other emerging markets whose banks have been given and extra six years until 2028 to comply with TLAC, the FSB said.
Banks could also plug the shortfall by issuing shares or retaining earnings.
“It is clear the benefits far exceed the costs of introducing this standard,” Carney said.
Citi bank analysts said the requirement will be manageable for European banks, with an estimated average 2pc earnings hit in 2017, rising to 4-5pc for Unicredit, Santander and BNP Paribas.
Banks moved early to meet tougher capital requirements since the crisis to reassure investors about their solvency. But Svein Andresen, FSB secretary-general, said he does not expect banks to necessarily rush headlong to meet TLAC rules early.
“Many banks have told us they will let existing liabilities run off and replace them in the course of normal refinancing,” Andresen said.
Published in Dawn, November 10th, 2015
