Divided global bank regulators are preparing for a showdown on rules intended to make sure taxpayers will not be on the hook when one of the world’s biggest lenders fails.
The Financial Stability Board (FSB) holds a plenary meeting in London today to finish work on total loss-absorbing capacity (TLAC).
Nations such as the US and Germany, which are pushing for the toughest rules, are pitted against Japan, France, and others that prefer a softer line.
Whichever camp prevails, it may be deposit-reliant behemoths such as JP Morgan Chase and Wells Fargo, rather than risk-addicted investment banks, that get hit the hardest.
Some analysts view that as an incongruous result, given that the FSB was created by the Group of 20 nations six years ago to stamp out the “reckless behaviour” by banks that led to the financial crisis.
The FSB’s draft rules on TLAC require lenders to have capital and debt equivalent to at least 16% to 20% of their risk-weighted assets available to take losses.
If the final number is at the low end of that range, most of the world’s biggest banks would have little trouble complying. A top-end number would force many lenders to issue billions of dollars of new debt, according to analysts.
“The big deposit-funded institutions may have to issue more bonds than they would like to,” said Robert Montague, an analyst at ECM Asset Management in London. “It’s one of the perverse outcomes of this regulation.”
While a compromise has been proposed, one of the people familiar with the talks said a decision in London is far from certain and the FSB may have to ask G-20 leaders to resolve the row.
Assuming the TLAC requirement is set at 20%, JP Morgan and Wells Fargo will have to issue the most securities to reach the goal, about $85bn (€76.2bn) and $65bn, respectively, according to Paul Smillie, a credit analyst at Columbia Threadneedle.
Analysts at Credit Sights in New York put the net shortfall at both banks at about $50bn.
Wholesale-funded trading firms such as Goldman Sachs Group and Morgan Stanley are already where they need to be, Mr Smillie said.
HSBC Holdings has a shortfall of more than $44bn if the requirement is set at the top of the range, according to an August 24 presentation on its website.
That is largely because the lender’s Hong Kong unit would need to issue $26.6bn of new debt. While setting the requirement at 16% reduces the group shortfall to $12.6bn, compliance would still cost as much as $300m a year, the bank said.
While depositors left their money in JP Morgan, HSBC and Wells Fargo, allowing them to get through the 2008 crisis largely unscathed, Goldman Sachs and Morgan Stanley struggled as institutions dumped their debt.
Yet aspects of the TLAC rules are particularly tough on the deposit-taking banks with large loan books.
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