World Economy

G20 Leaders Plan to End ‘Too-Big-to-Fail’ Banking

G20 Leaders Plan to End ‘Too-Big-to-Fail’ BankingG20 Leaders Plan to End ‘Too-Big-to-Fail’ Banking

World leaders are set to endorse plans by regulators to end the era of too-big-to-fail banks, forcing them to raise as much as $1.2 trillion, and backed proposals to wrap up sweeping reforms of rules for the global banking system.

The Financial Stability Board, created by the Group of 20 nations after the 2008 credit crunch, last week put forward a plan on how the world’s biggest banks can collapse without taxpayer bailouts. The proposals, which force bond investors to take losses if banks fail, are due to come into effect in two steps starting in 2019. G20 leaders signed off on them, according to a draft communiqué from the summit in Antalya, Turkey, Bloomberg reported.

The rules for “total loss absorbing capacity” complete the reconfiguration at banks designed to fix the failures and fill in the holes exposed by the crisis. It comes on top of measures that have forced banks to hold many times the amount of equity they had in the run-up to 2008. The FSB has also ordered lenders to issue bonds that can stop paying coupons and can be written off or converted into shares to preserve capital.

The Basel Committee on Banking Supervision, which sets international standards for banking regulation, said that its post-crisis reforms are set to be completed next year with new rules for trading books and for ways to calculate the riskiness of assets.

Raising Shortfalls

Under the rules approved by the G20, the world’s 30 biggest banks will have to have outstanding liabilities and instruments “readily available for bail in” equivalent to at least 16% of risk-weighted assets in 2019, rising to 18% in 2022. The banks’ shortfall under the 18% measure ranges from €457 billion to €1.1 trillion ($1.2 trillion), depending on the instruments considered, according to the FSB.

Chinese banks, among the world’s largest, have been given extra time to issue the securities they need to meet the FSB’s requirements. The four on the FSB’s list have until 2025 to reach total loss-absorbing capacity of 16% of risk-weighted assets, rising to 18% in 2028.

The three biggest–Agricultural Bank of China Ltd., Bank of China Ltd., and Industrial & Commercial Bank of China Ltd.–may have to issue as much as €269 billion of eligible securities by then, based on the FSB’s calculations. The number will rise by the needs of China Construction Bank Corp., which was added to the FSB’s list last month.

End Currency Wars

Group of 20 nations including China are united in rejecting policies that risk triggering currency wars while trying to bolster economic growth, according to the Turkish host government.

Currency devaluations should reflect market realities rather than become policy tools for national governments, Turkey’s Deputy Prime Minister Cevdet Yilmaz said Saturday in the Mediterranean city of Antalya.

Yilmaz’s comments suggest G20 concerns may be easing that China could further devalue the yuan as economic growth slows. The G20 meeting of finance ministers which Yilmaz hosted in September called on member states to “refrain from competitive devaluations” as finance chiefs from the world’s largest economies sought to contain the tensions from China’s August devaluation of its currency.

“Everyone is against competitive currency devaluation. But China has assured the group that it wouldn’t go on that path,” Yilmaz told reporters. “There is no expectation of a currency war.”

Equally important is that governments should refrain from raising trade barriers to protect domestic industries, he said. There is also a growing need for better communication on the future of monetary policies as different sets of challenges facing economies around the world are causing policy divergence, said Yilmaz.

“Although there is a recovery from the global economic recession, that recovery is neither strong enough nor equal in all parts of the world,” said Yilmaz. “The US is growing while commodities exporters such as Brazil and Russia are facing economic troubles and China sees expansion slow down,” Yilmaz said. While regional differences are normal, “what everyone needs is that these policies should be coordinated and supplementary to each other,” he said.