Global banking regulators on Monday unveiled a blueprint for preventing taxpayer bailouts of large banks that would double the cash cushion they would be required to have on hand to absorb losses.
Avoiding “too big to fail” bailouts has been a major concern of regulators since the global financial meltdown. The new rules proposed by the Financial Stability Board meet a deadline imposed by G20 leaders to develop proposals by the end of this year on the “adequacy of global systemically important financial institutions’ loss-absorbing capacity when they fail.”
The FSB has published a list of 30 banks it regards as “systemically important,” meaning their collapse could have a wider impact on global financial systems.
“Agreement on proposals for a common international standard on total loss-absorbing capacity for [big banks] is a watershed in ending ‘too big to fail’ for banks,” Mark Carney, FSB chairman and governor of the Bank of England, said in a news release.
“Once implemented, these agreements will play important roles in enabling globally systemic banks to be resolved without recourse to public subsidy and without disruption to the wider financial system,” he added.
The new rules would require global systemically important banks to hold minimum capital of 6% of total assets against losses — twice the provisional leverage ratio required by Basel III rules.
In addition, banks would be required to have capital equal to at least 16% and as much as 20% of their risk-weighted assets, such as loans. Part of this capital, the The New York Times reports, could be borrowed from investors who would earn interest but would lose their money if the bank got into trouble.
The Times said the proposals “aim to shift the burden of bank failures so that it falls more squarely on bank investors and the banks themselves” but “are certain to face stiff opposition from the banking industry, which is likely to argue that the rules would force banks to curb lending, hurting economic growth.”
According to BBC News, analysts estimate the new capital requirements could cost European banks about $250 billion, with the cost for globally significant banks in the United States, Japan and China likely to be much higher.
Image: World Economic Forum