Banking on Investors to Stop ‘Too Big to Fail’
Proposed Rules Would Put More Eyes on Banks’ Activities
By Paul J. Davies
Nov. 10, 2014 1:43 p.m. ET
When nuclear reactors go into meltdown, they are isolated and decommissioned. Regulators want to be able to do the same for global banks.
New proposals from the global Financial Stability Board aim to ensure that taxpayers should never again foot the bill for a big bank collapse. Even in the worst crisis, a bank should be able to prop itself up—at least until it can be safely wound down.
New requirements for so-called total loss-absorption capacity mean that many banks, especially in Europe, will be forced to sell hundreds of billions of euros worth of junior bonds, or new senior bonds that will suffer losses in a crisis. This is debt that can be “bailed-in”, so that taxpayers don’t have to pick up the tab.
The point of this debt is that a bank’s troubles should never threaten its depositors or other lenders who can pull their money out quickly.
That should help prevent bank runs, which can turn crippling but survivable losses into disastrous meltdowns. It should also stop banks and their investors and lenders from believing that only governments can bear the losses from big failures.
Banks are already changing the way they are structured, and how they issue debt, to allow regulators to deal with them more easily in a crisis.
UBS is creating a holding company that is legally separate from depositors in its operating bank. From there it can issue senior unsecured bonds that regulators can write down in value or convert into equity if needed.
The change is costing hundreds of millions of Swiss francs to execute, according to senior executives, but should lead to a lower core equity requirement.
Similarly, Barclays has begun issuing new senior bonds out of its holding company for the first time. Others, such as BNP Paribas or Deutsche Bank , may have to create a holding company or issue more expensive junior bonds.
HSBC faces a thornier issue: It is a collection of mostly deposit-funded subsidiaries, spread across continents. And among European banks it faces the highest requirement for issuance of new debt, at more than €90 billion ($112.1 billion), according to Morgan Stanley .
Some in the industry see the proposals as overkill. The new requirements will amount to as much as 25% of a bank’s risk-weighted assets, or a minimum of 6% of its total assets. The U.K.’s worst bank failure, Royal Bank of Scotland , needed government money equivalent to just 2.25% of its total assets.
The proposed rules will shift the pain of banking collapses from taxpayers to savers and investors. But, while markets are far from perfect, it is better that thousands of owners of equities and bonds are watching a bank’s risk-taking and performance than a handful of regulators alone.
This is the ultimate hope: All investors will be on the hook for losses ahead of taxpayers and so should become more interested and attentive stewards of banks’ activities.
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