World leads and members of the Financial Stability Board (FSB) meet at the G20 Turkey Leaders Summit on Nov. 14, 2015
Photographer: /Getty Images
End of ‘Too-Big-to-Fail’ Banking Era Endorsed by World Leaders
World leaders are set to endorse plans by regulators to end the era of too-big-to-fail banks, forcing them to raise as much as $1.2 trillion, and backed proposals to wrap up sweeping reforms of rules for the global banking system.
The Financial Stability Board, created by the Group of 20 nations after the 2008 credit crunch, last week put forward a plan on how the world’s biggest banks can collapse without taxpayer bailouts. The proposals, which force bond investors to take losses if banks fail, are due to come into effect in two steps starting in 2019. G-20 leaders signed off on them, according to a draft communique from the summit in Antalya, Turkey.
The rules for “total loss absorbing capacity” complete the reconfiguration at banks designed to fix the failures and fill in the holes exposed by the crisis. It comes on top of measures that have forced banks to hold many times the amount of equity they had in the run-up to 2008. The FSB has also ordered lenders to issue bonds that can stop paying coupons and can be written off or converted into shares to preserve capital.
The Basel Committee on Banking Supervision, which sets international standards for banking regulation, said on Friday that its post-crisis reforms are set to be completed next year with new rules for trading books and for ways to calculate the riskiness of assets.
In parallel, laws have changed in the main jurisdictions to set out how to deal with a collapsed lender. Prodded by the FSB, financial institutions and regulators are alsoupdating protocols governing trillions of dollars of securities and funding contracts to prevent a sudden unwinding of the trades should a bank go under.
Under the rules approved by the G-20, the world’s 30 biggest banks will have to have outstanding liabilities and instruments “readily available for bail in” equivalent to at least 16 percent of risk-weighted assets in 2019, rising to 18 percent in 2022. The banks’ shortfall under the 18 percent measure ranges from 457 billion euros to 1.1 trillion euros ($1.2 trillion), depending on the instruments considered, according to the FSB.
Chinese banks, among the world’s largest, have been given extra time to issue the securities they need to meet the FSB’s requirements. The four on the FSB’s list have until 2025 to reach total loss-absorbing capacity of 16 percent of risk-weighted assets, rising to 18 percent in 2028.
The three biggest -- Agricultural Bank of China Ltd., Bank of China Ltd., and Industrial & Commercial Bank of China Ltd. -- may have to issue as much as 269 billion euros of eligible securities by then, based on the FSB’s calculations. The number will rise by the needs of China Construction Bank Corp., which was added to the FSB’s list last month
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