The Financial Stability Board, a panel made up of central bankers, finance officials and top regulators from the world’s largest economies, plans to announce proposals Monday that would double the amount of money that large banks would be required to have on hand to absorb losses, reports New York Times.
The purpose of the new rules, which would not take effect until 2019 at the earliest, is to curtail risk-taking and protect taxpayers from having to bail out large banks in times of crisis, as happened on a grand scale during the financial crisis in 2008.
The new proposals, which have been hinted at for several weeks, aim to shift the burden of bank failures so that it falls more squarely on bank investors and the banks themselves. But the proposals are certain to face stiff opposition from the banking industry, which is likely to argue that the rules would force banks to curb lending, hurting economic growth. Banks and other interested groups have until Feb. 2 to submit comments on the rules.
The rules would allow large banks to be shut down “without recourse to public subsidy and without disruption to the wider financial system,” Mark J Carney, the governor of the Bank of England and chairman of the Financial Stability Board, said in a statement.
The rules would apply only to so-called global systemically important banks — banks that are so big and interconnected that their problems can create economic and financial havoc. Banks in emerging markets would initially be exempt from the rules.
If adopted, the rules would probably have the most impact on lenders like Deutsche Bank in Germany or BNP Paribas in France, which use a high proportion of borrowed money to do business. These banks might need to divert profit or sell new shares to raise more capital, or else jettison some of their most risky activities.
The new rules would have less impact in the United States, where regulators have already approved similar standards for the eight largest banks that take effect in 2018.
The Financial Stability Board has a mandate from the Group of 20 industrialized nations to develop guidelines that serve as a template for national regulations. The rules formulated by the board are not obligatory for individual countries, but governments face considerable international pressure to adopt them.
The board is based at the Bank of International Settlements, which provides financial services to the world’s central banks, in Basel, Switzerland. The board works closely with the Basel Committee on Banking Supervision to set global standards for bank regulation.
The rules will be formally presented to leaders of the G-20 nations when they meet in Brisbane, Australia, on Nov. 15 and 16.
Regulations created under the auspices of the G-20, known as the Basel III rules, are being enacted around the world and are expected to make banks safer, albeit less profitable.
The new rules would require global systemically important banks to hold twice as much capital, six per cent, as required by the Basel III rules. In addition, banks would be required to have capital equal to at least 16 per cent and as much as 20 per cent of their outstanding loans, derivatives portfolios and other assets, after adjusting for risk. Part of this capital could be borrowed from investors who would earn interest, but would lose their money if the bank got into trouble.
Combined with the impact of other new regulations, the rules would require banks to increase their capital to 25 per cent of assets adjusted for risk.
The rules, described by the FSB as “principles,” allow regulators to use discretion and tailor capital requirements to individual banks. The rules would also require banks to publish detailed information about their sources of capital.
The FSB said it would conduct a study of what impact the new rules would have on banks’ ability to issue credit, which is crucial for economic growth. Past studies have typically concluded that while higher capital requirements reduce lending temporarily, society benefits because there is a lower risk of a financial crisis that can devastate economies and drive governments to the brink of bankruptcy.
After studying the potential impact of the proposal and giving the public a chance to comment, the FSB will submit final rules to the G-20 leaders next year, it said.