FSB finalises 'robust' loss absorbency requirements for major global banks

The FSB, which coordinates financial policy for the G20 group of the world's largest economies, will instead give emerging markets until 2028 to implement its recommended total loss-absorbing capacity (TLAC) standard in full. Implementation will be speeded up in the event that a country's corporate debt market reaches 55% of its GDP in the next five years, according to its final report.

By 2022, global systemically important banks (G-SIBs) will be required to implement a TLAC cushion accounting for 18% of their risk-weighted assets (RWA), held in such a way that national regulators would be able to 'call in' those funds and wind up the bank in an orderly way in the event of failure. An initial 16% requirement will apply from 2019 or 2025 in the case of emerging markets, the FSB said.

FSB chair Mark Carney, who is also the governor of the Bank of England, said that the "robust" new standard would allow the largest banks to fail "without placing the rest of the financial system or public funds at risk of loss".

"The new standard, which will be implemented in all FSB jurisdictions, is an essential element for ending too-big-to-fail banks," he said. "The economic impact assessments conducted as part of the detailed policy work shows that the economic benefits of the final standard far outweigh the costs."

The cost to affected banks of meeting the new requirement could push up the cost of lending to the average borrower by between 2.2 and 3.2 basis points, and cost between 2 and 2.8 basis points of GDP annually, according to impact assessments conducted by the FSB. However, the benefits of the new standard "from the reduced likelihood and cost of crises" exceeded these costs, it said.

The new standard will operate separately and in addition to new capital requirements for large banks, due to come into force as part of the Basel III international banking reform agreement on 1 January 2019. It will apply to all banks designated as G-SIBs by the FSB. Banks will be able to meet the standard by issuing bonds or shares that can be called in if necessary, or by retaining earnings.

Banks will be required to meet a minimum TLAC requirement of at least 16% of risk-weighted assets from 1 January 2019 unless headquartered in emerging market economies, which will have until 1 January 2025. This should be increased to at least 18% by 1 January 2022, or 1 January 2028 for banks headquartered in emerging market economies, according to the announcement.

The FSB will monitor implementation of the standard, and carry out a review of the process by the end of 2019, it said.

Separately, the FSB has published its first "annual report" on progress by its member jurisdictions in implementing the various financial reforms agreed following the crisis of 2008. It said that implementation had been "steady but uneven", with some reforms due to be completed ahead of schedule. However, over-the-counter derivatives reform, shadow banking reform and resolution planning were all behind schedule, it said.

No "major unintended consequences" of the reforms have been identified by the FSB to date, it said in its report. However, it would "continue to monitor this going forward", it said.