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G-20 finalises tools for ending 'too big to fail' banks

Monday, November 9, 2015 - 16:38
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Mark Carney, governor of the Bank of England and chairman of the Financial Stability Board (FSB), speaks during a news conference after the board's plenary meeting at the Bank of England in London, U.K., on Monday, Mar 31, 2014.

[LONDON] Global regulators set out their "final tools" on Monday for ending the phenomenon of "too big to fail" banks, seeking to draw a line under a period of intensive rule making after a financial crisis that tarnished the sector and weighed heavily on taxpayers.

Mark Carney, chairman of the Financial Stability Board (FSB), which coordinates regulation across the Group of 20 economies (G-20) to plug gaps highlighted by the 2007-09 financial crisis, said many of the key reforms have been implemented decisively and promptly. "As a consequence, the financing capacity to the real economy is being rebuilt and significant retrenchment from international activity has been avoided," Mr Carney said in a letter to G-20 leaders ahead of their summit next week.

The G-20 tasked the FSB in 2009 with introducing a welter of reforms from increasing bank capital requirements to shining a light on derivatives markets and curbing bankers' bonuses.

Mr Carney, who is also Governor of the Bank of England, said the board has now finalised the tools needed to wind down "too big to fail" banks in an orderly way if necessary, seen as the last major financial reform of the crisis.

G-20 leaders meeting next week in Turkey will be asked to endorse a reform that requires the world's 30 top banks to issue a buffer of bonds by 2019 that can be written down to raise funds equivalent to 18 percent of risk-weighted assets, if the lender goes bust.

The buffer, known as total loss-absorbing capacity or TLAC, is in addition to the minimum core capital requirements a bank must already hold.

The aim is to allow a big bank to fail without creating the kind of mayhem in markets seen after Lehman Brothers bank went bust in 2008.

As flagged, the basis for calculating how much TLAC the big banks must hold has been scaled back. An open-ended exemption for the big banks from emerging markets like China has also been scrapped in favour of a longer phase-in. "Countries must now put in place the legislative and regulatory frameworks for these tools to be used," Mr Carney said in a letter to G-20 leaders.

Banks had warned that the new capital rules being rolled out made it too expensive in some cases to keep markets as liquid as they were before the crisis by offering to buy and sell bonds at any time.

The FSB has completed its first review of all the rules that have been introduced and said it has "not found evidence of significant unintended consequences to date". "Evidence is mixed, and the baseline for comparison should not be the unsustainable excess liquidity that existed prior to the crisis," Mr Carney said.

The FSB is still assessing the risks to financial stability from the activities of big asset managers and will publish recommendations "as necessary in the first half of 2016".

Misconduct at banks, such as trying to rig the Libor interest rate benchmark and currency markets, can create systemic risks, and the FSB has agreed an action plan to see if additional rules are needed.

REUTERS