Global financial regulators announced their plans to force large global banks to raise €1.19 trillion in special debt by 2022, in a bid to prevent them becoming “too big to fail”.
The rules, published on Monday by the Financial Stability Board (FSB), confirmed proposals for the Total Loss Absorbing Capacity (TLAC) standard, which unlike previous global requirements that focus primarily on equity, is centred around holding a lender’s creditors responsible for debt, rather than the taxpayer and ends the equal treatment of bondholders and depositors, whose deposits are usually insured by their governments, the FT reports.
“Ending ‘too big to fail’ may never be absolute because all financial institutions cannot be insulated fully from all external shocks. But these proposals will help to change the system so that individual banks as well as their investors and creditors bear the costs of their own actions,” wrote Mark Carney, governor of the Bank of England and chair of the FSB, in a letter to the G20.
According to reports, the FSB intend to propose plans to the Group of Twenty (G20), the international forum for governments and central bank governors across 20 major economies, later this month and have admitted that the TLAC rules could increase the cost of credit and damage economic growth, however, the impact would be limited and is outweighed by the benefits of increasing bank resiliency by “at least one-third”.
The proposed final range for TLAC, is 16 per cent of a banking group’s assets when measured for risk by 2019, rising to 18 per cent by 2022, and is lower than the 16-20 per cent proposed by the FSB last year in what Citigroup analysts called a “manageable hit” for the largest European banks, the FT reports.
The hardest hit by the new rules are emerging market banks which were previously exempt from TLAC rules, alongside the Agricultural Bank of China, Bank of China, China Construction Bank, Industrial and Commercial Bank of China, which will also no longer have an exemption around the rules.
Alongside the final TLAC standard, experts at the FSB, BCBS and Bank for International Settlements (BIS) are published the findings of the impact assessment studies in the form of the following reports:
- Overview report summarising the findings of the TLAC impact assessment studies
- Quantitative Impact Study report conducted by the BCBS
- Economic Impact Assessment report conducted by a group of experts chaired by the BIS
- Historical Losses and Recapitalisation Needs findings report
The impact assessment studies found that the micro and macro-economic costs of TLAC are relatively contained, according to a press release.