Global Banks Face 25% Loss-Absorbency Rule in FSB Plan
By Jim Brunsden
The FSB maintains a list of globally systemic banks that it updates each November. The latest list included 29 banks and identified HSBC Holdings Plc (HSBA) and JPMorgan Chase & Co. (JPM) as the banks whose failure would do the most damage to the global economy. The largest global banks will have to hold more capital and liabilities than previously reported that can automatically be written off in a crisis — as much as a quarter of risk-weighted assets — as regulators take on lenders deemed too big to fail. The Financial Stability Board is developing minimum standards that will limit the double-counting of capital banks use to meet existing international rules, according to an FSB working document sent for comment to Group of 20 governments and obtained by Bloomberg News. The restriction means that, while the basic requirement will be set at 16 percent to 20 percent of risk-weighted assets, the final number will be higher because the banks must separately meet “other regulatory capital buffers,” according to the document, dated Sept. 21. The FSB in Basel, Switzerland, declined to comment on the non-public document. While the FSB plan doesn’t specify the instruments that count toward TLAC, it spells out liabilities that don’t qualify, such as those “which are preferred to normal senior unsecured creditors under the relevant insolvency law,” or which arise from derivatives. Also excluded are liabilities that “cannot be effectively written down or converted into equity by the relevant resolution authority,” according to the document. Debt issued by the bank would also need to “have a minimum remaining maturity” of at least a year to count. “This approach seeks to satisfy the U.S. and U.K., which want loss absorption provided by long-term, unsecured debt and at the same time cut the rest of the world some slack by allowing the buffer also to include capital,” said Karen Shaw Petrou, managing partner of Washington-based research firm Financial Analytics Inc.