World Economy

‘Too Big to Fail’ Bank Rules Unveiled

‘Too Big to Fail’ Bank Rules Unveiled‘Too Big to Fail’ Bank Rules Unveiled

New global rules to prevent banks that are “too big to fail” from being bailed out by taxpayers have been announced.

The rules, created by the Financial Stability Board (FSB), a global regulator, require big banks to hold more money to protect against losses, BBC reported.

Mark Carney, FSB chairman and governor of the Bank of England, said the plans were a “watershed” moment.

Governments around the world spent billions bailing out stricken banks during the financial crisis of 2007-08.

In its wake, world leaders asked the FSB to come up with proposals to prevent similar bailouts from happening in the future.

The proposed new rules, which are up for consultation, require “global systemically important banks” to hold a minimum amount of cash to ensure they will be able to survive big losses without turning to governments for help.

The capital set aside should be worth 15-20% of the bank’s assets, the FSB said. It hopes this will prevent taxpayers from being forced to pay billions to prevent big banks from collapsing in the event of another financial crisis.

 Ending ‘Too Big to Fail’

“Agreement on proposals for a common international standard on total loss-absorbing capacity for [big banks] is a watershed in ending ‘too big to fail’ for banks,” said Carney.

“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.”

Analysts estimate the new capital requirements could cost €200b ($249.4b) for Europe’s banks alone, with the cost for globally significant banks in the US, Japan and China likely to be much higher.

The FSB has published a list of 30 banks it regards as “systemically important”, meaning their collapse could have a wider impact on global financial systems.

In the UK, the banks are Barclays, Standard Chartered, HSBC and the Royal Bank of Scotland.

Lloyds Banking Group has been removed from the list as its potential impact on financial systems has declined in recent years.

The UK government’s support for the financial system was worth more than £1.1t ($1.75t) at the height of the financial crisis, according to a recent report by the National Audit Office.

It spent around £65b bailing out RBS and Lloyds. The government still owns an 80% stake in RBS and 25% of Lloyds.