New regulations from the Financial Stability Board (FSB) proposed
this week could see the world’s 30 largest banks issue up to $1.19tn by 2022. The ‘total loss-absorbing capital’ (TLAC) rule requires banks to add to their capital buffers over the next seven years, so that, in the event of another financial crisis, individual banks can stand the costs of their own actions.
Mark Carney, Governor of the Bank of England and Chair of the FSB, said in a statement: “It is important to recognise that success in ending too big to fail may never be absolute because all financial institutions cannot be insulated fully from all external shocks.”
Power in numbers?Writing for
Salon, David Dayen praised the FSB for unveiling a policy with teeth, calling the move “a vital step”. He believes that the announcement proves the worth of financial reform activism following years of outrage from taxpayers forced to bail out too-big-to-fail banks.
Dayen continues: “Only outside pressure has pushed regulators toward what were previously seen as unattainable targets. And because there’s so much more to be done, reformers should not close up shop but work even harder.”
He notes that TLAC debt will be one of the first lines of finance that banks will use to offset their own losses – a 'bail-in' instead of a bailout. And while the FSB’s new rules are not without risk, they will still force globally important banks to finance more of their operations with loss-absorbing equity.
Salon blog
Better than nothingGawker’s Hamilton Nolan, meanwhile, questioned if TLAC was the right solution. He cites
Bloomberg’s query as to whether simply requiring banks to hold more equity would be just as effective.
“Some regular people might ask: why not just require banks to hold more cash in case of emergency, rather than setting up this system of bonds, which is too complicated for a blogger to even explain?” he says.
“And indeed, the
Bloomberg editorial board asked the same thing: ‘How is this better than simply requiring banks to have more equity in the first place? Equity absorbs losses without requiring regulators to trigger bail-ins or strike cross-border agreements. Banks need more of it.’”
While Nolan doesn’t offer an opinion on whether or not this alternative has an equal chance of success, he does praise TLAC as a step in the right direction. “In any case, it is an encouraging sign that something rather than nothing is being done about 'too big to fail', a dynamic that serves to socialise Wall Street losses even as their gains are privatised. If this doesn’t work, we can always just break up the banks.”
Gawker view
Tough choices for global playersFinally, George Hay,
Reuters’ Breaking News Columnist, warns that the rules could make banks less global. He explains that, while on the face of it, American and European global systemically important banks will be able to better compete with China’s state-owned banks, TLAC remains a headache for financial institutions that fund themselves primarily with deposits.
Hay says: “They will have to issue debt that can be written down if necessary. To hit an additional 18% TLAC target by 2022, banks would in the toughest scenario have to raise over €1.1tn, the FSB reckons.”
He adds that local regulators will hold more power over large foreign lenders. This means that those with overseas branches may be required to keep up to 90% of local TLAC requirements in that jurisdiction. On top of this, they may face further capital requirements from host regulators.
“For a global bank that runs most of its business off a single balance sheet – like, say, Deutsche Bank – this is potentially expensive,” says Hay. “Ever since the FSB suggested this ‘pre-positioning’ requirement last November, banks have moaned that making capital less fungible will hurt efficiency.
“The FSB’s final decision forces banks to reconsider their geographical footprint. The price to pay for global bank rules may be fewer global banks.”
Reuters column
Seen a blog, news story or discussion online that you think might interest CISI members? Email joanna.lewin@wardour.co.uk