New rules published Monday by global financial regulators are designed to stop megabanks all across the world from becoming “too big to fail.” The tighter regulations will force the 30 largest global banks to raise around $1.2 trillion by 2022. This new capital must be held in the form of debt or other securities that can be written off when winding down failing banks.
The new regulations are promulgated by the Swiss-based Financial Stability Board aim to make sure that large global banks maintain significant financial cushions to absorb losses if a bank is failing. This would ensure that the failure of one or more of these too-big-to-fail banks would not lead to a crisis in the wider banking system. The new global FSB rules will make banks fully fund themselves in order to be prepared to weather a crisis, and guarantee that the cost of a megabank’s failure will be borne by its investors rather than taxpayers.
In April, Li Lu and Bruce Greenwald took part in a discussion at the 13th Annual Columbia China Business Conference. The value investor and professor discussed multiple topics, including the value investing philosophy and the qualities Li looks for when evaluating potential investments. Q3 2021 hedge fund letters, conferences and more How Value Investing Has Read More
More on new FSB rules for too-big-too-fail banks
The new FSB regulations apply to the 30 largest global financial institutions, including HSBC Holdings, JPMorgan Chase, Citigroup, Bank of America, Deutsche Bank, which the board categorizes as “systemically important.” In general, an institution is considered systemically important if its failure might represent a threat to the broader 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,” noted Mark Carney, governor of the Bank of England and current chairman of the FSB, on Monday.
Moreover, the FSB rules “will support the removal of the implicit public subsidy enjoyed by systemically important banks,” Carney continued. He also said the goal was to ensure that creditors and shareholders rather than taxpayers would pay the cost if a major bank failed.
These large lenders will have by January 2019 to create a 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 (TLAC) requirement slowly moves up until it reaches 18% of assets weighted by risk as of January 2022.
FSB analysts project that the 18% standard would force the 30 global megabanks to raise a total of around €1.11 trillion ($1.19 trillion) by 2022.
The new FSB rules also institute a leverage ratio requirement, that is, the ratio of capital held by a bank compared to its total assets. The new minimum standard means SIBs must hold at least 6% of their total assets as capital by 2019, moving up to 6.75% by 2022.
To reach these new global standards, banks will have to issue debt that could be used to pay losses in a crisis. The goal is to have sufficient funds to cover any costs arising from being wound down or recapitalized. The regulations also ban such protective, loss-absorbing securities from being held by other SIBs.
Financial industry analysts point out that the the new rules are not nearly as stringent as the FSB’s original proposal made public late last year, which proposed a minimum TLAC requirement of 20% for the too-big-to-fail financial titans. Bank lobbyists obviously had a very busy and fruitful year.
See full report below.