Global banks must raise €1.1tn in special debt by 2022

FT Thomas Hale in Basel, Caroline Binham and Laura Noonan in Londo

Bank of England governor Mark Carney©PA

Mark Carney

The biggest international banks must raise as much as €1.1tn by 2022 in special debt designed to prevent taxpayer bailouts of lenders, a global group of policymakers said as it claimed it had “created the tools needed to end too big to fail banks”.

The Financial Stability Board, which makes policy recommendations to leaders of the Group of 20 large economies, confirmed its final proposals for Total Loss Absorbing Capacity, or TLAC, on Monday.

While previous global requirements have focused on equity, TLAC is about debt that can be converted into equity when a bank fails, essentially putting a lender’s creditors on the hook rather than the taxpayer. It also ends the equal treatment of bondholders and depositors, whose deposits are often insured by their governments.

The FSB, which will put the plan to the G20 later this month, confirmed a widely anticipated range for TLAC that will be 16 per cent of a banking group’s assets when measured for risk by 2019, rising to 18 per cent by 2022.

“Ending ‘too big to fail’ may never be absolute because all financial institutions cannot be insulated fully from all external shocks,” wrote Mark Carney, the governor of the Bank of England who also chairs the FSB, in a letter to the G20. “But these proposals will help change the system so that individual banks as well as their investors and creditors bear the costs of their own actions.”

European banks have become increasingly concerned about rising capital demands, and are describing the latest round of regulation as Basel IV, the successor of the Basel III regulations that do not come into force until 2019.

“It’s not capital, it’s loss absorbency — there’s a big difference,” Mr Carney told journalists. “There is no Basel IV. There is the completion of Basel III . . . What we’re doing is ironing out issues that have been identified over time in terms of the application of Basel III.”

The FSB admitted that the TLAC rules could push up the cost of credit and hurt economic growth but said the impact would be “very limited” and was outweighed by the benefits of increasing bank resiliency by “at least one-third”, reducing the likelihood of systemic crises and cutting the fiscal costs of dealing with them when they do occur.

The final range is lower than the 16-20 per cent spectrum first proposed by the FSB last year but had been widely reported last month. The range has already been described by Citigroup analysts before Monday’s announcement as a “manageable hit” for the largest European banks, equating to about 2 per cent of income.

But the FSB’s estimates of the current TLAC shortfall swing from as little as €42bn to the €1.1tr figure, depending on the timeframe and what kind of debt is considered eligible. Mr Carney said finalising the TLAC rules put a “hard timetable” on banks’ resolution planing — the other necessary conditions for the elimination of “too big to fail” in banking.

Hardest hit are emerging market banks, which previously enjoyed an exemption from TLAC rules. Four of the 30 lenders that are so-called global systemically important banks, or G-SIBs, currently have no senior debt instruments that count towards TLAC, the FSB said.

Four banks, Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China, will no longer have an exemption around TLAC and have been given deadlines for the lower and upper ranges of 2025 and 2028 respectively. The exemption, widely seen as a sop to the Chinese, was controversial because it undermined the principle of a global level playing field.

Despite TLAC’s design as a global package, Mr Carney played down global regulators’ concerns about law changes in some countries that would make it easier for their banks to meet the requirements. “All can be reconciled,” he said.

The FSB also published research challenging banks’ contention that the capital rules already introduced have crushed liquidity, particularly in the debt markets.

The FSB said that evidence on the topic was “mixed” and that “bid-ask spreads for many debt products do not suggest that liquidity levels have declined”. High bid-ask spreads can suggest reduced market liquidity since they represent a big difference between the amount of a buyer will pay and a seller will charge. The FSB plans further analysis in the area.

The detail of the FSB’s analysis on the implementation of TLAC says the proposals could dent economic growth by roughly 0.02 to 0.05 percentage points during the period, assuming that banks’ funding costs increase and they compensate by lifting interest rates on loans by between 5 and 15 basis points.

Its impact study suggested that requiring one-third of TLAC to be made up of debt instruments rather than equity will prove challenging. It found just five out of the 30 lenders it surveyed were able to meet an early version of that rule by 2014.

Additional reporting by Jim Brunsden in Brussels and Barney Jopson in Washington

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