Something Is Being Done About the “Too Big to Fail” Problem

Under TLAC, systematically important banks will need to issue a buffer of bonds by 2019 that can be written down to raise funds equivalent to 16 percent of a risk-weighted asset, rising to 18 percent in 2022, i.e. a shortfall ranging from $490 billion to $1.2 trillion, depending upon the kind of debt.

The world’s biggest banks must bolster their cash reserves by up to €1.1 trillion ($1.2 trillion) as protection against any future financial crises, an influential Basel-based advisory body said on Monday.

British, European and American banks have already built up big buffers in the years since the financial crisis, meaning they do not have far to go to meet the new Total Loss Absorbing Capacity (TLAC) targets. A leverage ratio requirement will also be imposed, rising from six percent initially to 6.75 percent. FSB called those banks the most systemically important lenders.

If their regulators abide by the new proposals those banks will have to raise as much as €415bn.

Mark Carney, chair of the FSB, said “The FSB has agreed a robust global standard so that G-SIBs can fail without placing the rest of the financial system or public funds at risk of loss”.

The Financial Stability Board (FSB), which was formed in the wake of Lehman Brothers’ cataclysmic 2008 collapse, issued final rules Monday for JPMorgan, Citigroup, Bank of America, Goldman and other big banks deemed at risk of being “too big to fail”.

Carney said in an interview last week that it would take “several years” for banks to “reorganize their capital structure and also their business models” to comply with TLAC, and only then would regulators be in a position to resolve a major global bank.

Still, the new rules are more favorable to banks than what was seen in the regulators’ original proposal launched last November, which suggested the minimum TLAC requirement could be as high as 20 per cent.

As of the end of 2014 the FSB calculated banks in the developed world were at 14.1% TLAC.

The FSB clarified that: “The conformance period will be accelerated if, in the next five years, corporate debt market in these economies reaches 55 percent of the emerging market’s economy’s GDP”. “This new series of annual reports will enable the G20 to assess whether the financial reforms are achieving their intended results in an effective manner and thereby supporting financial stability and sustainable growth”.