10th November 2014
International regulator the Financial Stability Board (FSB) has unveiled new proposals aimed at ensuring taxpayers never again have to bail out banks.
Bank of England governor Mark Carney, who is also chairman of the FSB described the plans as a “watershed moment”. The new legislation essentially means that banks would have to hold a bigger cash buffer on their books so they can cope with any heavy losses.
The proposals, which are designed to ensure “the continuity of critical economic functions”, are the response to a call from G20 leaders at the 2013 St. Petersburg Summit to develop new rules by the end of 2014.
They were developed by the FSB in consultation with the Basel Committee on Banking Supervision (BCBS) and will, once finalised, form a new minimum standard for “total loss-absorbing capacity”.
During the financial crisis many governments were forced to use taxpayers’ money to save a number of banks from collapse. In the UK, the government still has a 25% stake in Lloyds and a massive 80% in RBS
The rules according to Carney should also help achieve a level playing field internationally, reducing big banks funding cost advantage and ensuring “they compete on a more equal footing within their home and foreign markets”.
Carney said: “Agreement on proposals for a common international standard on total loss-absorbing capacity for global systemically important banks is a watershed in ending “too big to fail” for banks. Once implemented, these agreements will play important roles in enabling globally systemic banks to be resolved without recourse to public subsidy and without disruption to the wider financial system.”
Commenting on the proposals, Andrew Tyrie MP, Chairman of the Treasury Committee, said: “Large banks benefitted from cheap credit as a result of being ‘too big to fail’. This in turn encouraged them to take excessive risks. So the Financial Stability Board’s focus on ensuring that even large banks can be wound up without cost to taxpayers and without disruption to the economy is essential.
“Only when these reforms are tested by experience will it be clear whether they are enough. What is more, effective resolution will be reliant on national regulators co-operating at a time of crisis.
“This makes it all the more important that the integrity of the UK’s ring-fence is maintained and that electrification deters the banks from gaming the system. The provision of core services must be protected from any financial problems that may emerge elsewhere in a banking group.”