 "G20's new rules to rein in giant banks")
Banking behemoths led by HSBC Holdings Plc and JPMorgan Chase & Co now know the cost they'll have to shoulder so the global financial system doesn't have another Lehman moment.
The Financial Stability Board (FSB), created by the Group of 20 nations in the aftermath of the crisis, published its plan for tackling banks seen as too big to fail. The most systemically important lenders must have total loss-absorbing capacity (TLAC) equivalent to at least 16 per cent of risk-weighted assets in 2019, rising to 18 per cent in 2022, the FSB said on Monday. A leverage ratio requirement will also be imposed, rising from six per cent initially to 6.75 per cent. Bloomberg reported these numbers on October 2.
The shortfall banks face under the 18 per cent measure ranges from euro 457 billion to euro 1.1 trillion ($1.2 trillion), depending on the instruments considered, according to the FSB. Excluding the three Chinese banks in the FSB's 2014 list of the world's most systemically important institutions, that range drops to euro 107 billion from euro 776 billion.
"The TLAC announcement is hugely important; it's a milestone of the first order in bank reform and ending too big to fail," Wilson Ervin, vice-chairman of the Group Executive Office at Credit Suisse Group AG, said before the announcement. "There are a lot of important details to consider and hopefully improve, but the big picture is, if you have a bank rescue fund with $4 trillion to $5 trillion of resources, you can break the back of this problem."
'Greater pressure'
Bank of England Governor Mark Carney, who heads the FSB, said the rules make a major failure less likely because banks' creditors know they'll face losses in a collapse. 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. 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 recapitalised 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.
Public purse
The hundreds of billions of dollars governments globally poured into banks reeling from the 2008 financial crisis were used as much to rescue lenders' senior bondholders, whose claims sat alongside and were equal to those of depositors, as to bail out the banks themselves. The situation confronted governments with the choice of risking bankruptcy by rescuing the lenders or allowing the disorderly collapse of the financial system.
Jonathan Hill, the European Union's financial-services chief, welcomed the FSB rule, which shows that decisive steps have been taken to end the era of banks being too big to fail and having to be supported by the public purse, according to commission spokeswoman Vanessa Mock.
Business models
Carney said in an interview last week that it would take "several years" for banks to "reorganise their capital structure and also their business models" to comply with TLAC, and only then would regulators be in a position to resolve a major global bank. Analysis done by the Basel Committee on Banking Supervision showed that two-thirds of the banks on the FSB's list are short of their targets for 2019.
Those in developed markets had 14.1 per cent TLAC at the end of 2014 and need to boost that level by euro 498 billion in the next three years. Including the emerging-market banks, the shortfall amounts to euro 767 billion.
Banks from the US, European Union, Japan and Switzerland account for the lion's share of the FSB's list of systemic institutions. The Federal Reserve moved on October 30 to apply the TLAC standard to eight of the biggest US banks, estimating their total shortfall of long-term debt at $120 billion.
"TLAC is crucial," Nathan Sheets, US Treasury undersecretary for international affairs, said before the announcement. "It's a very important step forward toward addressing concerns about too big to fail, giving large financial institutions additional buffers that can be drawn on in extremis to protect the taxpayer from having to bail out these institutions."
'Contained' impact
Emerging-market banks in the FSB list have until 2025 to meet the 16 per cent loss-absorbing capacity target, rising to 18 percent in 2028. This schedule could be accelerated if, "in the next five years, corporate debt markets in these economies reach 55 per cent of the emerging market economy's" gross domestic product, according to the FSB.
The FSB said the impact of TLAC on funding costs will be "relatively contained".
The estimated costs for banks of meeting the minimum requirement "translate into increases in lending rates for the average borrower that range from 2.2 to 3.2 basis points, while the median long-run annual output costs are estimated at 2 to 2.8 basis points of GDP," the regulator said.
"The benefits of TLAC arise from the reduced likelihood and cost of crises and exceed these costs, with even the most conservative assumptions yielding estimated benefits of between 15 and 20 basis points of annual GDP," the FSB said.
Orderly resolution
Authorities in some G-20 nations still lack the powers needed to be able to resolve a major lender without turning to taxpayers, the FSB said. Along with bail-in, these powers include the ability to prevent counterparties demanding early settling of trades, the power to establish a bridge bank and to impose changes in company structure and management.
The regulator gives the US, EU, Japan and Switzerland a largely clean bill of health in its review of the G-20's progress in implementing measures needed to resolve large cross-border lenders in an orderly manner. Yet China lacks the majority of the powers it would need should one of them fail, according to the FSB.
The extent to which taxpayers can be shielded when major banks fail will depend on how bail-in, a concept which Credit Suisse's Ervin helped to develop, works in practice. Ervin was the Swiss lender's chief risk officer at the time when Lehman Brothers Holdings Inc failed in September 2008.
"Let's hope that it takes longer than in the past before governments have to get involved, because that's one way of thinking about the bail-in process and how it's supposed to work," said Stefan Ingves, chairman of the Basel committee. "We just don't know how it will work."
The Financial Stability Board (FSB), created by the Group of 20 nations in the aftermath of the crisis, published its plan for tackling banks seen as too big to fail. The most systemically important lenders must have total loss-absorbing capacity (TLAC) equivalent to at least 16 per cent of risk-weighted assets in 2019, rising to 18 per cent in 2022, the FSB said on Monday. A leverage ratio requirement will also be imposed, rising from six per cent initially to 6.75 per cent. Bloomberg reported these numbers on October 2.
The shortfall banks face under the 18 per cent measure ranges from euro 457 billion to euro 1.1 trillion ($1.2 trillion), depending on the instruments considered, according to the FSB. Excluding the three Chinese banks in the FSB's 2014 list of the world's most systemically important institutions, that range drops to euro 107 billion from euro 776 billion.
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"The TLAC announcement is hugely important; it's a milestone of the first order in bank reform and ending too big to fail," Wilson Ervin, vice-chairman of the Group Executive Office at Credit Suisse Group AG, said before the announcement. "There are a lot of important details to consider and hopefully improve, but the big picture is, if you have a bank rescue fund with $4 trillion to $5 trillion of resources, you can break the back of this problem."
'Greater pressure'
Bank of England Governor Mark Carney, who heads the FSB, said the rules make a major failure less likely because banks' creditors know they'll face losses in a collapse. 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. 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 recapitalised 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.
Public purse
The hundreds of billions of dollars governments globally poured into banks reeling from the 2008 financial crisis were used as much to rescue lenders' senior bondholders, whose claims sat alongside and were equal to those of depositors, as to bail out the banks themselves. The situation confronted governments with the choice of risking bankruptcy by rescuing the lenders or allowing the disorderly collapse of the financial system.
Jonathan Hill, the European Union's financial-services chief, welcomed the FSB rule, which shows that decisive steps have been taken to end the era of banks being too big to fail and having to be supported by the public purse, according to commission spokeswoman Vanessa Mock.
Business models
Carney said in an interview last week that it would take "several years" for banks to "reorganise their capital structure and also their business models" to comply with TLAC, and only then would regulators be in a position to resolve a major global bank. Analysis done by the Basel Committee on Banking Supervision showed that two-thirds of the banks on the FSB's list are short of their targets for 2019.
Those in developed markets had 14.1 per cent TLAC at the end of 2014 and need to boost that level by euro 498 billion in the next three years. Including the emerging-market banks, the shortfall amounts to euro 767 billion.
Banks from the US, European Union, Japan and Switzerland account for the lion's share of the FSB's list of systemic institutions. The Federal Reserve moved on October 30 to apply the TLAC standard to eight of the biggest US banks, estimating their total shortfall of long-term debt at $120 billion.
"TLAC is crucial," Nathan Sheets, US Treasury undersecretary for international affairs, said before the announcement. "It's a very important step forward toward addressing concerns about too big to fail, giving large financial institutions additional buffers that can be drawn on in extremis to protect the taxpayer from having to bail out these institutions."
'Contained' impact
Emerging-market banks in the FSB list have until 2025 to meet the 16 per cent loss-absorbing capacity target, rising to 18 percent in 2028. This schedule could be accelerated if, "in the next five years, corporate debt markets in these economies reach 55 per cent of the emerging market economy's" gross domestic product, according to the FSB.
The FSB said the impact of TLAC on funding costs will be "relatively contained".
The estimated costs for banks of meeting the minimum requirement "translate into increases in lending rates for the average borrower that range from 2.2 to 3.2 basis points, while the median long-run annual output costs are estimated at 2 to 2.8 basis points of GDP," the regulator said.
"The benefits of TLAC arise from the reduced likelihood and cost of crises and exceed these costs, with even the most conservative assumptions yielding estimated benefits of between 15 and 20 basis points of annual GDP," the FSB said.
Orderly resolution
Authorities in some G-20 nations still lack the powers needed to be able to resolve a major lender without turning to taxpayers, the FSB said. Along with bail-in, these powers include the ability to prevent counterparties demanding early settling of trades, the power to establish a bridge bank and to impose changes in company structure and management.
The regulator gives the US, EU, Japan and Switzerland a largely clean bill of health in its review of the G-20's progress in implementing measures needed to resolve large cross-border lenders in an orderly manner. Yet China lacks the majority of the powers it would need should one of them fail, according to the FSB.
The extent to which taxpayers can be shielded when major banks fail will depend on how bail-in, a concept which Credit Suisse's Ervin helped to develop, works in practice. Ervin was the Swiss lender's chief risk officer at the time when Lehman Brothers Holdings Inc failed in September 2008.
"Let's hope that it takes longer than in the past before governments have to get involved, because that's one way of thinking about the bail-in process and how it's supposed to work," said Stefan Ingves, chairman of the Basel committee. "We just don't know how it will work."