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LONDON (Alliance News) - The Financial Stability Board Monday unveiled new proposals aimed at ending the problem of the world's largest banks being "too big to fail" and requiring bailouts paid for by taxpayers in the event of their failure.
Under the proposals, global systemically important banks will have to increase levels of total loss-absorbing capacity in order to ensure they have the capacity to absorb losses and to enable authorities to resolve them in a way that minimises the hit to broader financial stability and the continuity of their critical economic functions.
The FSB said the proposals on total loss-absorbing capacity, together with other measures that have been introduced or proposed by authorities since the financial crisis of 2007 to 2009, should remove the implicit public subsidy from which global systemically important banks currently benefit when they issue debt.
"Global systemically important banks may pass on a share of their higher funding costs to their clients, prompting a shift of banking activities to other banks without necessarily reducing the amount of activity. Alternatively, global systemically important banks' dividends and other distributions, such as employee remuneration, might fall," the FSB said in its consultative document.
In a list updated last week, the FSB named 30 global systemically important banks, including HSBC Holdings PLC, JP Morgan Chase, Barclays PLC, BNP Paribas, Citigroup, Deutsche Bank, Bank of America, Credit Suisse, Goldman Sachs, Mitsubishi UFJ FG, Morgan Stanley, and Royal Bank of Scotland Group PLC.
The FSB also said the proposals should encourage creditors to better monitor global systemically important banks' risk-taking. The measures are also aimed at encouraging a more level playing field internationally by reducing global systemically important banks' funding cost advantage.
According to the FSB's document, most global systemically important banks would need to expand their issuance of financial instruments eligible under the proposals. Some senior debt currently in issuance would need to be restructured in order to be eligibile as total loss-absorbing capacity.
The FSB also said the proposals need to be taken in the context of the benefits that will arise from more economically efficient pricing of global systemically important banks' services and risk taking and less mis-allocation of capital and resources.
Bank of England Governor Mark Carney, who will continue to chair the FSB after he was last week reappointed for a second and final term of three years, said the agreement on the proposals on a common international standard on total loss-absorbing capacity for major banks is a "watershed" in ending the 'too big to fail' problem.
"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," Carney said in a statement.
The FSB is seeking comments and responses to the proposals by February 2, 2015. Firms will have to comply with the resulting new rules by January 1, 2019 at the earliest.
The FSB will revise the principles and term sheet in light of the public consultation and findings from a quantitative impact study and market survey and submit a final version to the G-20 by the 2015 Summit.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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