Word on the web: The end of bank bailouts?

The Financial Stability Board has announced proposals that Mark Carney, Governor of the Bank of England, says will end taxpayer bank bailouts. But is the plan practical?  

This week, the Financial Stability Board (FSB) proposed new rules that will require "too big to fail" banks to hold more money to protect against losses. Mark Carney, Governor of the Bank of England and Chairman of the FSB, deems this a "watershed moment" that will prevent taxpayers footing the bill in the event of a future crisis.

Under the 'Total Loss-Absorbing Capacity' (TLAC) proposals, the world's biggest banks will each have to create a capital buffer equal to 16-20% of their risk-weighted assets. This means that shareholders and bondholders would bear the brunt if banks could not support themselves using their own resources.

But with TLAC not taking effect until 2019, critics are already questioning the practicalities.

Necessary reformsPositive Money, a movement that seeks to democratise banking, believes TLAC is an important step towards ensuring taxpayers "would never again have to bail out a bank". Blogging in reaction to Carney's plans, the think tank points out "the added benefit that banks will be far more concerned with the types of loans they are making".

The blog calls for "a Positive Money system" in which investors would have explicitly agreed to accept the risks of their investments, so that there would be no justifiable case for the government to guarantee them.

"If a bank makes bad decisions and loses money, customers who provided the money for those investments will lose money," it claims. "In this situation, the bank in question would be wound down, broken up and sold off. Borrowers would continue to pay off their loans (at the same rate as before) to whoever bought their loan contracts." This, Positive Money claims, would be far easier and cheaper to do than under the existing system.

Positive Money blog

Impossible to judge Nils Pratley puts forward a different argument in his blog for The Guardian. He agrees that the FSB announcement marks a "watershed moment", but asks whether we can truly rely on governments to "hold their nerve" in the event of a future financial crisis.

In many ways, Pratley argues, Carney is on the right track. The fact that financial regulators have finally stated how big capital buffers need to be to ensure that taxpayers aren't forced to rescue banks is undoubtedly a step in the right direction.  

But, he asks, would governments really allow bondholders' losses to "ricochet throughout the financial system"? Pratley concludes that we cannot know the answer to this question, and therefore we cannot judge TLAC, until it undergoes the ultimate test: a financial crisis.

The Guardian blog

Missing the pointBut The Independent's Jim Armitage has judged Carney's proposals and he encounters a problem. While conceding that forcing big banks to create greater capital cushions is "all well and good", he believes that the new regulations fail to address "the whole point that the financial crisis and all those taxpayer bailouts made clear - we have allowed our banks to become way too big for our own good".

Carney's additional measures would not be needed, Armitage claims, if we had taken the opportunity to break up the "too big to fail" banks when we had the chance, during the crisis. As a result, he argues, "we have never in history had so few banks which are so systematically important".  

The Independent comment

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Published: 14 Nov 2014
  • News
  • Word on the web
  • Banking
  • Bank of England

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