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 Mark Carney, chairman of the Financial Stability Board (FSB) that
coordinates regulation across the Group of 20 economies (G20) 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," Carney said in a letter to G20 leaders
ahead of their summit next week.
The G20 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.
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.
G20 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.
Under the worse case scenario, the banks would have to issue a total
of 1.1 trillion euros ($1.18 trillion) in bonds. The bulk of this,
or 755 billion euros, would be in China and other emerging markets
whose banks have been given and extra six years until 2028 to comply
with TLAC, the FSB said.
Banks could also plug the shortfall by issuing shares or retaining
earnings.
"It is clear the benefits far exceed the costs of introducing this
standard," Carney said.
Banks moved early to meet tougher capital requirements since the
crisis to reassure investors about their solvency. But Svein
Andresen, FSB secretary-general, said he does not expect banks to
necessarily rush headlong to meet TLAC rules early.
"Many banks have told us they will let existing liabilities run off
and replace them in the course of normal refinancing," Andresen
said.
Some of the banks like Bank of America, UBS, Credit Suisse and Citi
have already said they already meet or will comfortably meet the
TLAC rules.
The Swiss finance ministry said on Monday that the new rules it
outlined last month would comprehensively meet TLAC standards and in
parts exceed the minimum requirements of international standards.
Last month the Federal Reserve published rules to apply a TLAC-style
rule on the biggest U.S. banks who would need to raise an additional
$120 billion in long-term debt.
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The EU is applying a similar requirement on all banks based in the
28-country bloc with rules compatible with TLAC to avoid
duplication.
NO BASEL IV
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
favor of a longer phase-in.
"Countries must now put in place the legislative and regulatory
frameworks for these tools to be used," Carney said in a letter to
G20 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," Carney said.
He rejected criticisms from banks that TLAC and other changes to
bank capital rules over the coming year amount to a quantum increase
on the current Basel III framework.
"There is no Basel IV. What we are doing is ironing out issues that
have been identified over time in the application of Basel III,"
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. The FSB
has agreed an action plan to see if additional rules are needed,
particularly regarding pay structures in the sector to stop
encouraging reckless behavior.
($1 = 0.9289 euros)
(Additional reporting by Joshua Franklin in Zurich; Editing by Hugh
Lawson and Tom Heneghan)
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