Too big to fail banks need to raise €460bn in capital

The world’s biggest banks, particularly those in emerging markets, need to build up big capital buffers over the coming five years

Mark Carney, Governor of the Bank of England leaves number 10 Downing Street after a Global Economy Roundtable meeting in London

The Financial Stability Board, headed by Mark Carney, wants to be sure banks' investors pay for any future collapse, not taxpayers Photo: AFP

5:31PM GMT 09 Nov 2015

The biggest banks in the world need to raise almost half a billion euros to add to their capital buffers over the next seven years in the latest bid to end the ‘too big to fail’ problem whereby giant lenders are bailed out by governments if they collapse.

Officials at the Financial Stability Board, a group of international regulatorsled by the Bank of England’s governor Mark Carney, hope that this will mean banks are less likely to collapse in the way that Lehman Brothers did, sending shockwaves through the world economy.

When a bank struggles or does collapse, bank investors and creditors will pay up rather than the taxpayer, in a move which is designed to stop further bailouts such as those of Royal Bank of Scotland and Lloyds Banking Group.

"It is important to recognise that success in ending too big to fail may never be absolute because all financial institutions cannot be insulated fully from all external shocks," said Mr Carney.

"But these proposals will help change the system so that individual banks as well as their investors and creditors bear the costs of their own actions, and the consequences of the risks they take."

Aerial night view of Canary Wharf in London docklands

Big banks in the UK and USA have spent years building up their capital buffers and so have relatively little work to do to hit the new targets  Photo: Getty Images

The globally significant banks (GSIBs) – those which would seriously harm the wider economy if they fail – could have to boost their buffers of high-quality capital by as much as €1.1 trillion in the coming years.

However, most of that can be found by re-shuffling their existing buffers, leaving €457bn to be raised in the coming years.

British, European and American banks have already built up big buffers in the years since the financial crisis, meaning they do not have far to go to meet the new Total Loss Absorbing Capacity (TLAC) targets.

TLAC is made up of debt issued by the banks including contingent convertable bonds, or cocos. These are instruments which act like debt until a bank gets into financial difficulty, at which point the debt converts into equity, wiping out the debt and boosting the bank's capital position.

The new rules mean the banks in developed economies will have to shuffle around roughly €450bn of capital and only raise an additional €42bn. That will give them a TLAC buffer amounting to 18pc of their risk-weighted assets, which they have to hit by 2022.

A bigger challenge comes for banks in emerging markets. If their regulators abide by the new proposals those banks will have to raise as much as €415bn.

GSIBs in countries like China had previously been exempt from the international rules, and as they are among the biggest banks in the world, their contribution to the overall capital buffers would be substantial.

China's biggest banks have previously been exempt from the international capital rules and so may have to work harder to build up their buffers

Analysts at PwC said the guidance from the FSB helps banks understand exactly what regulators are looking for on capital.

"Many GSIBs will now resume the debt issuance that has been put on hold while waiting for today's details,” said Richard Barfield.

"The FSB's impact analysis shows that most GSIBs should be able to meet the requirements of TLAC at 16pc of Risk-Weighted Assets by 2019 and 18pc by 2022. TheFSB also believes that the impact of increased financing costs on bank profitability should be manageable. However, we expect that some banks will face greater challenges than others."

G20 leaders are meeting on 15 November to discuss the plans.