The Financial Stability Board (FSB) has issued a new policy on the adequacy of loss-absorbing and recapitalisation capacities for global systemically important banks (G-SIBs).
The standards will require banks to have the capacity to absorb a 20 per cent fall in the value of their assets before resorting to help from the central bank. Before 2007, some banks had the capacity to endure a fall of just 2 per cent in asset value.
The FSB’s new 20 per cent standard for “total loss-absorbing capacity” (TLAC) aims to instil confidence that G-SIBs have sufficient capacity to absorb losses and avoid another bail out by taxpayers, as occurred during the recent financial crisis.
G-SIBs’ recovery and resolution plans, their impact on the banking system, business models, risk profiles, and organisational structures will be analysed when determining their TLAC adequacy.
Mark Carney, governor of the Bank of England and chair of the FSB, called the reforms a “watershed in ending ‘too big to fail’ banks”, promising that the new standards will prevent the burden of bailing out failing banks from falling on taxpayers and public subsidy, and will not create a disruption to the global financial system.
These standards are the latest in a series of tougher regulations on the banking industry, including curbs on dividends and bonuses paid out by banks.
Matthew Bird, investment and mortgage adviser at Newport-based Seer Green Financial Planning, said, “The new regulations will affect the advisory business on the lending side, including mortgages. If the banks have to have higher capital provision then they will lend less. It acts as a bottleneck on the economy.
“The problem behind the financial crisis was heavily steeped into property itself, with companies like Northern Rock lending without much evidence of borrowers’ income. Other companies followed suit in order to remain in competition.
“Mortgage applications are much more robust now than they used to be. You can’t get a 100 per cent mortgage anymore, and you have to have a squeaky clean record to get a 95 per cent mortgage. The banks should never be able to lend 100 per cent anyway, without any kind of deposit. They need that capital for equity.”
The 30 G-SIBs, including Barclays, Citigroup, HSBC, JP Morgan, Lloyds, Morgan Stanley, RBS and Santander will be subject to the new rules. An assessment of the impact of the regulations will commence in 2015, with the standards likely to come into effect in 2019.
