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Bank of England gives banks until 2020 to build buffers to prevent future taxpayer bailouts
[LONDON] Britain's banks will have until 2020 to put in place an extra buffer of funds that will be tapped in a crisis to shield taxpayers from having to bailout failed lenders again, the Bank of England said on Friday.
The BoE was setting out its new rules for how 400 banks and building societies will have to hold an additional cushion of loss-absorbing bonds on top of their core, mandatory capital requirements.
The rules, published for consultation, are based on a European Union law that will require all banks across the 28-country bloc to hold the extra buffer known as minimum requirement for own funds and eligible liabilities or MREL.
The central bank estimated that the net shortfall of such funds is currently 26 billion pounds (S$55.5 bilion) for the biggest banks such as HSBC, Lloyds, Barclays and RBS, for whom it will cost some 1.4 billion pounds a year to service.
The vast majority of MREL requirements will be met by re-issuing existing debt at banks.
The new rules are seen by policymakers as the final piece of banking regulation since the 2007-2009 financial crisis to end so-called "too big to fail" banks. "The implementation of MREL is a crucial step forward to ensuring that any banks, large or small, carries sufficient resources to be resolved in an orderly way, without recourse to public subsidy and without disruption to the wider financial system," BoE Governor Mark Carney said in a statement.
The aim is to ensure that the shareholders and bondholders of a bank bear the losses when a lender goes bust.
The BoE said that depositors could, in some circumstances, also bear losses on amounts held in accounts above the 75,000 pounds that is automatically insured under EU rules.
Banks will be told in the second quarter of 2016 what is the indicative amount of MREL they must hold by January 2020.
The lenders will be given some flexibility as to how they will reach that level, the BoE said.
HSBC, Lloyds and Barclays have already been deemed to be among the 30 global systemic banks who must hold a layer of bonds, know as TLAC.
The BoE said their level of MREL will not be higher than the globally-set TLAC but they must comply with a 2019 deadline.