The Financial Stability Board, created by the G20 nations in the aftermath of the crisis, published its plan for tackling banks seen as too big to fail.
The most systemically important lenders must have total loss-absorbing capacity equivalent to at least 16% of risk-weighted assets in 2019, rising to 18% in 2022, the FSB said yesterday.
A leverage ratio requirement will also be imposed, rising from 6% initially to 6.75%.
The shortfall banks face under the 18% measure ranges from €457bn to €1.1trn, depending on the instruments considered, according to the FSB.
Excluding the three Chinese banks in the FSB’s 2014 list of the world’s most systemically important institutions, that range drops to €107bn to €776bn.
“The TLAC announcement is hugely important; it’s a milestone of the first order in bank reform and ending too big to fail,” said Wilson Ervin, vice chairman of the group executive office at Credit Suisse Group AG, before the announcement.
Bank of England governor Mark Carney, who heads the FSB, said the rules make a major failure less likely because banks’ creditors know they will face losses in a collapse.
Previously, the “lenders, the unsecured creditors, to a bank were implicitly and ultimately explicitly relying on the state to back them up, and therefore didn’t pay that much attention to what the institutions were actually doing”, Carney told reporters in Basel on Monday.
“Now... they will exert greater pressure, consistent with their fiduciary duties, and that in and of itself will make failure less likely.”
The FSB rules separate the liabilities needed to keep a bank running from purely financial debts such as notes issued for funding.
By “bailing in” the bonds, writing them down or converting them to equity, regulators aim to ensure a lender in difficulty has the resources to be recapitalised without using public money, and to allow the resolved firm to continue to operate.
In a departure from previous practice, senior debt issued by banks is explicitly exposed to loss.