Banks face 25% loss buffer

The world’s largest banks will have to boost loss-absorbing liability buffers to see them through a crisis, as regulators move to tackle too-big-to-fail lenders six years after the collapse of Lehman Brothers Holdings Inc.
The Financial Stability Board, led by Bank of England Governor Mark Carney, said Monday that the biggest banks may be required to have total loss-absorbing capacity equivalent to as much as a quarter of their assets weighted for risk, with national regulators able to impose still-tougher standards. The FSB is seeking comment on the rule, known as TLAC, which would apply at the earliest in 2019.
The plans are a “watershed” in regulators’ mission to end the threat posed by banks whose size and systemic importance mean their failure would be catastrophic for the global economy, Carney told reporters today in Basel, Switzerland. “The outlines of how we are going to end too-big-to-fail are here.”
The rules are the latest step by the FSB in a five-year quest to boost banks’ resilience in the face of financial shocks. Agreement has already been reached on measures including tougher capital requirements and enhanced scrutiny by supervisors.
The TLAC rules would apply to the FSB’s register of global systemically important banks. The latest list, published last week, contains 30 banks, with HSBC Holdings Plc (HSBA) and JPMorgan Chase & Co. (JPM) identified as the most significant.
The draft requirements announced by the FSB would measure banks’ ability to absorb losses in a crisis, shielding taxpayers from bailouts.
European banks set to have to issue the most new debt to meet the rule may include BNP Paribas SA, Banco Santander SA, Societe Generale SA, Deutsche Bank AG, Banco Bilbao Vizcaya Argentaria SA and UniCredit SpA, according to analysts at Citigroup Inc.
Spokespeople for Societe Generale, Deutsche Bank and UniCredit declined to comment on the FSB release. A call seeking comment at BNP Paribas wasn’t immediately returned.
Satisfying the TLAC requirements could cost European banks as much as 3 percent of their estimated 2016 profits, London-based Citi analysts Andrew Coombs, Kinner Lakhani and Ronit Ghose said in a research note. “Least impacted” are Swiss and U.K. banks, which would benefit from existing holding company structures from which they can issue senior debt, they said.
Once the rules are in force, banks that breach, or are deemed as “likely” to breach, their TLAC requirements would face restrictions from regulators, including curbs on their ability to pay bonuses and dividends.
Banks hit by the rule “may pass on a share of their higher funding costs to their clients, prompting a shift of banking activities to other banks without necessarily reducing the amount of activity,” the FSB said. Also, banks’ “dividends and other distributions, such as employee remuneration, might fall.”
Other side effects could include a decline in funding costs for governments, the FSB said.
Instruments that banks will be allowed to count as TLAC include equity resulting from their issuance of ordinary shares, retained earnings and other securities that can count toward regulatory capital. The definition of TLAC also includes some other liabilities, such as some unsecured debt, where losses could be be imposed on creditors without practical or legal impediments.
While the basic requirement will be set at 16 percent to 20 percent of risk-weighted assets, the final number will be higher because the banks must separately meet other capital buffers already set by global regulators, the FSB said.
The FSB will seek views on the plans and carry out detailed impact studies next year, before completing the rule in time for the 2015 G-20 summit. This further work will allow the FSB to identify a “single specific minimum” requirement.
Carney, who was appointed to a second three-year term as FSB chairman last week, said there was scope within the rules for some senior unsecured debt to count toward a bank’s TLAC.
For debt to count toward TLAC it would have to have a remaining maturity of more than a year, Carney said. “The second thing is it has to be subordinate to other creditors, to creditors who if they were bailed in would contribute to a disorderly resolution,” such as derivatives counterparties, he said.

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