The world’s biggest banks may have to raise as much as $1.2 trillion in loss-absorbing securities under new rules aimed at preventing future taxpayer bailouts.
The Financial Stability Board, created by the Group of 20 nations in the aftermath of the financial crisis, on Monday unveiled its plan to make sure giant lenders can be wound down and recapitalized in an orderly way.
The plan requires systemically important banks to have a financial cushion, or total loss-absorbing capacity (TLAC), of at least 16% of risk-weighted assets in 2019, rising to 18% in 2022. Another rule requires large banks to hold at least 6% of their total assets as capital by 2019, rising to 6.75% by 2022.
The banks’ shortfall under the 18% TLAC standard ranges from 457 billion euros to 1.1 trillion euros ($1.2 trillion), depending on the instruments considered, according to the FSB.
“The FSB has agreed [to] a robust global standard so that [systemic banks] can fail without placing the rest of the financial system or public funds at risk of loss,” said Mark Carney, governor of the Bank of England and chairman of the FSB.
Previously, the “lenders, the unsecured creditors, to a bank were implicitly and ultimately explicitly relying on the state to back them up, and therefore didn’t pay that much attention to what the institutions were actually doing,” Carney told reporters in Basel on Monday. “Now they actually have skin in the game, so to speak, and they will exert greater pressure, consistent with their fiduciary duties, and that in and of itself will make failure less likely.”
The FSB rules separate the liabilities needed to keep a bank running from purely financial debts such as notes issued for funding, according to Bloomberg. By “bailing in” the bonds — writing them down or converting them to equity — regulators aim to ensure a lender in difficulty has the resources to be recapitalized without using public money, and to allow the resolved firm to continue to operate.
In a departure from previous practice, senior debt issued by banks is explicitly exposed to loss.