10 November 2014
An international standard has been proposed to end the ‘too big to fail’ global banking culture.
The Financial Stability Board (FSB) has issued proposals for a set of principles and a detailed term sheet outlining the adequacy of loss-absorption and the recapitalisation capacity of global systemically important banks (G-SIBs).
The purpose of the proposals is to ensure banking institutions have enough capital so that in the event of another financial crisis or failure, the public does not have to bail them out.
To achieve this aim, the proposals, once finalised, will form a new minimum standard for ‘total loss-absorbing-capacity’ (TLAC). This should result in G-SIBs being able to sufficiently absorb losses, both before and during resolution.
The FSB also states that the standard will enable resolution authorities to implement a strategy that that minimises any impact on financial stability as well as ensuring the continuity of critical economic functions.
According the FSB, the proposals will strengthen the credibility of the resolution authorities that public taxpayer money will not be used to bail out banking institutions and neither will public money be used to subsidise debt issued.
Chair of the FSB, Mark Carney has commented that the proposals are a ‘watershed’ moment in ending the too big to fail culture prevalent with banking institutions.
He added that: ‘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.’