Global regulators are recommending that systemically important banks should hold double the capital of smaller banks to guard against the risk of failure and possible damage to the financial system.
The Financial Stability Board (FSB) issued a set of policy proposals for public consultation Monday that consists of a set of principles and a detailed term sheet on the adequacy of loss-absorbing and recapitalisation capacity in global systemically important banks (G-SIBs). The proposals were developed by the FSB in consultation with the Basel Committee on Banking Supervision.
The FSB says that, once finalized, the new capital requirements will form a new minimum standard for “total loss-absorbing capacity”; which, it says, should provide regulators with confidence that G-SIBs “have sufficient capacity to absorb losses, both before and during resolution, and enable resolution authorities to implement a resolution strategy that minimises any impact on financial stability and ensures the continuity of critical economic functions.”
Specifically, the proposals calls for a minimum TLAC requirement that is set within the range of 16% – 20% of risk-weighted assets (RWAs); and, at a minimum, twice the Basel III leverage requirement.
The FSB says that, by strengthening the credibility of authorities’ commitments to resolve systemically important banks without exposing taxpayers to loss, the TLAC, along with other measures, should act to remove the implicit public subsidy that G-SIBs currently enjoy when they issue debt. And, it says that the measures should incentivize creditors to better monitor banks’ risk-taking; and reduce their funding advantage.
“Agreement on proposals for a common international standard on total loss-absorbing capacity for G-SIBs is a watershed in ending “too big to fail” for banks. Once implemented, these agreements will play important roles in enabling globally systemic banks to be resolved without recourse to public subsidy and without disruption to the wider financial system,” said Mark Carney, chair of the FSB.
Separately, the FSB also announced that Carney, former head of the Bank of Canada, and current governor of the Bank of England, Mark Carney has been reappointed as its chairman, for a second term of three years.
The FSB is seeking comment on the proposals by Feb. 2, 2015. It says that, in early 2015, it will undertake comprehensive impact assessment studies to inform the calibration of the new requirements. It’s aiming to have the proposals finalized by the next G20 leaders’ summit in 2015.