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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