If their regulators abide by the new proposals those banks will have to raise as much as €415bn. The report describes progress by FSB member jurisdictions in implementing the financial reforms agreed in the wake of the global financial crisis; presents early analysis on the effects of those reforms; and highlights areas for closer monitoring.
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The percentage would increase to 18% by 2022.
The new standards aim to make banks change the way they fund themselves to better weather a crisis, a requirement that could force a few firms to issue billions in new securities and debt and possibly dent profits.
The FSB’s requirements are a bit more arcane than just telling banks “have more money, in the bank”, but they amount to the same goal: create a pool of money to shore up teetering banks, and lay out exactly who should expect to lose money when banks go into crisis.
The global watchdog, chaired by Bank of England governor Mark Carney, believed the new rules would make a repeat of the collapse of Lehman Brothers – with the implied risks for the world’s financial system – less likely as banks’ creditors would know they would face losses in such an event and act accordingly to impose financial discipline.
Affected banks would be required to have a loss-absorbing capacity equivalent to at least 16% of risk-weighted assets in 2019.
The rules also see a requirement for the leverage ratio – the ratio of capital held by a bank against its total assets.
To meet the standards, banks will have to issue debt that could be easily absorbed to pay losses in times of a crisis so they can cover any costs that would arise from being wound down or recapitalized. Those in developed markets had 14.1 percent TLAC at the end of 2014 and need to boost that level by 498 billion euros in the next three years. According to a few estimates, America’s eight largest banks would now need to raise an additional $120 billion to meet the Fed’s target.
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”.
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The plans were published ahead of a meeting of leaders of the Group of 20 major economies in Antalya, Turkey, later this month.
