(Reuters) - Global regulators are expected to give the green light on Monday to two measures they hope will shield taxpayers from having to rescue failed banks again.
The Financial Stability Board (FSB) meets in Paris to endorse the capital surcharge and bank resolution proposals that will be put out to public consultation ahead of final approval by leaders of the world's top 20 economies (G20) in November.
The measures are part of a wider effort by the FSB, the G20's regulation task force, to tackle "too big to fail" banks and learn lessons from a financial crisis that forced governments to shore up lenders on both sides of the Atlantic.
Regulators want to stop big banks benefiting from cheaper borrowing costs because markets assume governments won't allow them to fail and wreak the havoc as seen after the collapse of Lehman Brothers in 2008.
The proposal for a capital surcharge on the world's biggest banks by 2019 -- referred to as systemically important banks or SIBs -- was drafted and announced by the global Basel Committee on Banking Supervision in June.
"I don't expect any major tweaks at this stage - and I expect many of the authorities involved will have other things on their minds right now," said Simon Hills, a director at the British Bankers' Association, alluding to the deepening euro zone debt crisis.
Around 30 big banks like Goldman Sachs, Morgan Stanley, HSBC and Deutsche Bank will have to hold an extra 1-2.5 percent of capital on top of a new, tougher minimum level of 7 percent for all banks, known as Basel III being phased in between 2013 and end 2018.
The surcharge proposal was due last November but was caught up in haggling among G20 countries.
What has emerged is a careful balancing act between a narrower surcharge than expected to please countries like Germany and France, but in the form of pure equity to satisfy hardliners like Britain and the United States.
FSB Chairman Mario Draghi will hold a news conference at 1600 GMT on Monday in Paris.
COCOS AND TOOLKITS
The FSB is expected to indicate the number of banks falling under the scope of the new surcharge but give no names, sources familiar with the discussion said.
The level of surcharge is based on how banks rate according to five criteria -- size, interconnectedness, global activity, complexity and how difficult it is to substitute operations.
"It will be interesting to see if they give the percentage weight to the five criteria and whether they also include the penalties for going below the surcharge buffer," a banking analyst said.
The Basel draft surprised the industry by ruling out the use of hybrid debt known as contingent convertible capital or CoCos which convert to equity in times of stress.
There are still hopes among banks that the FSB or G20 leaders will row back on this to allow some use of CoCos.
The second proposal sets out requirements for G20 countries for resolving big banks which typically have operations across many countries.
It is expected to be similar to a draft European Union bank crisis resolution draft law due in September which sets out a "toolkit" national regulators must have to deal with a failing banks.
One controversial idea that will be discussed is to force bondholders to take a "haircut" and contribute to a bank rescue.
There is some consensus that junior bondholders should take a hit but some hardline countries say hitherto ringfenced senior debt holders should also be ultimately in the firing line.
The other parts of the "too big to fail" initiative include tougher supervision on big banks, improved financial markets infrastructure -- in particular central clearing and trade reporting of derivatives which is already underway -- and a more serious approach to "peer reviews" of how FSB measures are being implemented.
Once the new system starts being implemented for banks, regulators want to turn their attention to including other big financial institutions such as insurers.
Source: http://www.reuters.com
The Financial Stability Board (FSB) meets in Paris to endorse the capital surcharge and bank resolution proposals that will be put out to public consultation ahead of final approval by leaders of the world's top 20 economies (G20) in November.
The measures are part of a wider effort by the FSB, the G20's regulation task force, to tackle "too big to fail" banks and learn lessons from a financial crisis that forced governments to shore up lenders on both sides of the Atlantic.
Regulators want to stop big banks benefiting from cheaper borrowing costs because markets assume governments won't allow them to fail and wreak the havoc as seen after the collapse of Lehman Brothers in 2008.
The proposal for a capital surcharge on the world's biggest banks by 2019 -- referred to as systemically important banks or SIBs -- was drafted and announced by the global Basel Committee on Banking Supervision in June.
"I don't expect any major tweaks at this stage - and I expect many of the authorities involved will have other things on their minds right now," said Simon Hills, a director at the British Bankers' Association, alluding to the deepening euro zone debt crisis.
Around 30 big banks like Goldman Sachs, Morgan Stanley, HSBC and Deutsche Bank will have to hold an extra 1-2.5 percent of capital on top of a new, tougher minimum level of 7 percent for all banks, known as Basel III being phased in between 2013 and end 2018.
The surcharge proposal was due last November but was caught up in haggling among G20 countries.
What has emerged is a careful balancing act between a narrower surcharge than expected to please countries like Germany and France, but in the form of pure equity to satisfy hardliners like Britain and the United States.
FSB Chairman Mario Draghi will hold a news conference at 1600 GMT on Monday in Paris.
COCOS AND TOOLKITS
The FSB is expected to indicate the number of banks falling under the scope of the new surcharge but give no names, sources familiar with the discussion said.
The level of surcharge is based on how banks rate according to five criteria -- size, interconnectedness, global activity, complexity and how difficult it is to substitute operations.
"It will be interesting to see if they give the percentage weight to the five criteria and whether they also include the penalties for going below the surcharge buffer," a banking analyst said.
The Basel draft surprised the industry by ruling out the use of hybrid debt known as contingent convertible capital or CoCos which convert to equity in times of stress.
There are still hopes among banks that the FSB or G20 leaders will row back on this to allow some use of CoCos.
The second proposal sets out requirements for G20 countries for resolving big banks which typically have operations across many countries.
It is expected to be similar to a draft European Union bank crisis resolution draft law due in September which sets out a "toolkit" national regulators must have to deal with a failing banks.
One controversial idea that will be discussed is to force bondholders to take a "haircut" and contribute to a bank rescue.
There is some consensus that junior bondholders should take a hit but some hardline countries say hitherto ringfenced senior debt holders should also be ultimately in the firing line.
The other parts of the "too big to fail" initiative include tougher supervision on big banks, improved financial markets infrastructure -- in particular central clearing and trade reporting of derivatives which is already underway -- and a more serious approach to "peer reviews" of how FSB measures are being implemented.
Once the new system starts being implemented for banks, regulators want to turn their attention to including other big financial institutions such as insurers.
Source: http://www.reuters.com
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