Global regulators have proposed new rules to ensure that bank creditors rather than taxpayers pick up the bill when a big lender collapses.
After the financial crisis in 2007 to 2009, governments had to spend billions of dollars of state money to rescue banks that ran into trouble and could have threatened the global financial system if allowed to go under. Since then, regulators from the Group of 20 economies have been trying to find ways to prevent this happening again.
The plans envisage that global banks like Goldman Sachs and HSBC should have a buffer of bonds or equity equivalent to at least 16% to 20%of their risk-weighted assets, like loans, from January 2019. These bonds would be converted to equity to help shore up a stricken bank.
The banks’ total buffer would include the minimum mandatory core capital requirements banks must already hold to bolster their defences against future crises. The rule will apply to 30 banks that the regulators have deemed to be globally “systemically important,” though initially three from China on that list of 30 would be exempt.
Breaches should be punished by curbing dividends and bonuses, the FSB said. Most of the banks would need to sell more bonds to comply with the new rules, the FSB said.
Some bonds — known as “senior debt” that banks have already sold to investors would need to be restructured. Senior debt was largely protected during the financial crisis, which meant investors did not lose their money.
However, Bank of England governor Mark Carney said in future these bonds might have to bear losses if allowed under national rules and investors were warned in advance.