Q&A: G20 plans for "too big to fail" banks

LONDON (BestGrowthStock) – The Group of 20 leading economies (G20) holds a summit in Seoul on November 11-12 where it is expected to make some progress on dealing with “too big to fail” banks.

The aim is to ensure that if any of the world’s 30 or so top “systemically important” financial institutions (SIFIs) get into trouble, they can be dealt with quickly at no cost to the taxpayer and without disrupting the broader financial system.

The plan was for a complete package to be endorsed in Seoul but regulators signaled this week that more work needs to be done amid a lack of consensus on key aspects.

WHO IS DRAFTING THE PACKAGE?

The G20 has tasked the Financial Stability Board (FSB), made up of central bankers, regulators and treasury officials from its member countries, to draft the package.

The Basel Committee of banking supervisors and central bankers is providing some of the detailed technical work.

Both met in G20 host country South Korea this week.

It has became clear that next month’s summit will endorse a set of broad recommendations rather than a complete package.

WHAT’S IN IT?

— A capital surcharge on SIFIs

— A requirement that SIFIs should have extra “loss absorbency” capacity, which could comprise hybrid debt such as bail-in and contingent capital (CoCos) which convert into equity and boost a bank’s capital when it gets into trouble.

— More intensive supervision of SIFIs

— A mechanism to resolve a struggling SIFI without disruption to the financial system or taxpayer support

— Use of central counterparties for off exchange trading of derivatives by SIFIs.

WHERE ARE THE DISAGREEMENTS?

— What criteria do you use to define a SIFI?

Some countries don’t accept that some of their leading banks are global SIFIs and therefore subject to extra curbs.

Wrangling over definition of “SIFIness” may continue into next year with perhaps an interim list of global SIFIs from the obvious candidates focused on first.

Some regulators believe that big banks low on the SIFI scale — not so connected to other banks or can easily be wound down in a crisis — should at least escape any surcharge. Disagreement over whether the final list of SIFIs should be published.

— No consensus over capital surcharge: Some regulators have indicated it could be 2-3 percent on top of the minimum requirements for all banks. Japan, Germany and France oppose surcharges on their big banks.

Switzerland has already pushed ahead with topping up on the new global minimum capital requirements known as Basel III with a “Swiss finish.” Britain and United States also want a belt and braces approach to capital levels.

A European Union position paper for the G20 put emphasis on a combination of bail-in, levies, resolution and enhanced supervision with extra capital “where appropriate” rather than mandatory.

— Questions over converting debt: When would the debt convert to equity? Is there enough investor appetite for this riskier type of bond? Would they really work in a crisis? The Basel Committee said this week it will finalize its work on this by the middle of next year.

— Resolution: Is possible without major changes in national laws to put in place an effective mechanism to resolve problems in big cross-border banks and prevent collapses?

IMPLEMENTATION

The aim is for all G20 countries with a global SIFI to select options from the FSB package. A common global approach appears to have been shelved, however.

FSB Chairman Mario Draghi said this week that the application of any of the elements in the package will differ from country to country. The FSB will conduct “peer reviews” of implementation but gave no timeline.

Q&A: G20 plans for "too big to fail" banks