FSB eyes new rules to end too-big-to-fail banks

10th November 2014, Comments 0 comments

The Financial Stability Board, a global banking watchdog, presented Monday new rules that would push mega-banks to nearly double their financial buffers in order to shield economies and taxpayers if they collapse.

The new rules are "a watershed in ending 'too big to fail' for banks," said Mark Carney, FSB chief and head of the Bank of England.

The new rules are meant to help avoid a repetition of the 2008 crisis sparked by the Lehman Brothers collapse, which shook the global financial sector to its core.

Numerous governments had to step in and save other large banks from tanking and dragging down entire economies in the process.

"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," Carney said in a statement.

Mega-banks, sometimes managing more than the total gross domestic product of the country hosting them, know that governments have no choice but to bail them out if they get into trouble.

"The knowledge that this can happen encourages (them) to take excessive risks and represents a large implicit public subsidy of private enterprise," the FSB said.

To avoid such risk taking at taxpayers' expense, FSB wants 30 such giant lenders, including UBS, Citigroup and HSBC, to increase their capital reserves equivalent to at least 16 to 20 percent of their risk-weighted assets.

The new rules double the amount of capital the banks will have to set aside to absorb losses.

In the wake the 2008 crises global banking regulations were already tightened.

Under the so-Basel III rules that are being gradually phased lenders are being required to hold a capital cushion of at least 7.

0 percent of the total risks they are carrying, with banks considered "too-big-to-fail" required to keep an additional cash stash of at least 2.

5 percent.

The FSB has called for public input on the rules until February 2, and plans, along with the Basel Committee on Banking Supervision and the Bank for International Settlements to conduct "comprehensive impact assessment studies" to help fine-tune the initial implementation of the rules.

The final draft should be completed in time for a summit of G20 leaders at the end of 2015, the FSB.


© 2014 AFP

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