Big Banks Could Be Forced to Raise Up to $1.19 Trillion in New Securities
November 09 2015 - 07:10AM
Dow Jones News
BRUSSELS—Global financial regulators published new rules that
aim to stop banks from becoming "too big to fail," to prevent a
repeat of the 2008 financial crisis, when taxpayers had to bail out
banks whose collapse would have threatened large-scale financial
panic.
The plan, drawn up by the Financial Stability Board in Basel,
Switzerland, aims to ensure that the world's biggest lenders
maintain sizable financial cushions that can absorb losses as a
bank is failing, without threatening a crisis in the broader
banking system. It sees the cost of a giant bank's failure being
borne by its investors, not taxpayers.
The new standards aim to make banks change the way they fund
themselves to better weather a crisis, a requirement that could
force firms to raise more than $1 trillion in new securities and
possibly dent profits.
The rules will apply to the world's top 30 banks, such as HSBC
Holdings PLC, J.P. Morgan Chase & Co. and Deutsche Bank AG,
which the FSB classifies as "systemically important." Banks are
considered to be systemically important if their failure would pose
a broad threat to the economy.
"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.
The rules "will support the removal of the implicit public
subsidy enjoyed by systemically important banks," he said Monday.
The aim was to ensure that creditors and shareholders—and not
taxpayers—would bear the costs when banks failed.
The standard, which comes seven years after the 2008 financial
crisis, "is an essential element for ending too-big-to-fail for
banks," he added.
Under the plan, large lenders will have by January 2019 to hold
a financial cushion of at least 16% of their risk-weighted assets
in equity and debt that can be written off. The minimum total loss
absorption capacity, or TLAC, requirement will gradually increase,
reaching 18% of assets weighted by risk by January 2022.
Banks supervisors estimated that the 18% standard would require
banks to raise €1.11 trillion ($1.19 trillion) of loss-absorbing
securities by 2022.
The rules also see a requirement for the leverage ratio—the
ratio of capital held by a bank against its total assets. The
minimum standard requires large banks to hold at least 6% of their
total assets as capital by 2019, rising to 6.75% by 2022.
To meet the standards, banks will have to issue debt that could
be easily absorbed to pay losses in times of a crisis so they can
cover any costs that would arise from being wound down or
recapitalized. Rules will also aim to prevent such loss-absorbing
securities from being held by other systemically important
banks.
Still, the new rules are more favorable to banks than what was
seen in the regulators' original proposal launched last November,
which suggested the minimum TLAC requirement could be as high as
20%.
Instruments that will count toward TLAC include common-equity
Tier 1 capital—the highest-quality capital buffer banks keep to
absorb losses on their assets.
Eligible instruments should have at least one year of remaining
maturity, while derivatives products, tax liabilities or insured
deposits can't count toward the minimum standard.
The minimum, however, doesn't include equity used to make up
other "regulatory applicable capital buffers"—the additional
buffers certain systemically important banks need to hold. This
means they could end up having to hold an even higher proportion of
their risk-weighted assets in instruments that can be "bailed in"
if a bank is failing.
Large banks based in emerging markets will face the same
requirements but with more favorable deadlines, having to comply
with the two phases of minimum standards six years later in each
case. This could be accelerated, however, if corporate-debt markets
in these countries reach 55% of the emerging economy they are based
in.
The plans were published ahead of a meeting of leaders of the
Group of 20 major economies in Antalya, Turkey, later this month.
Leaders of the G-20 must endorse the FSB's new rules before they
come into force.
The FSB is a group of regulators bringing together
representatives from the world's largest economies in Europe, Asia
and North and South America.
The U.S. Federal Reserve Board proposed its new rules for
systemically important banks on Oct. 30.
Write to Viktoria Dendrinou at viktoria.dendrinou@wsj.com
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(END) Dow Jones Newswires
November 09, 2015 06:55 ET (11:55 GMT)
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