WASHINGTON – The Financial Stability Board finalized a standard Monday that will require 30 of the world's largest banks to hold a combination of debt and equity that could be used to absorb losses and facilitate a resolution if one of them were to become insolvent.
The requirement, known as "total loss-absorbing capacity," is central to regulators' plan to end government bailouts of globally systemically important banks.
"The FSB has agreed a robust global standard so that GSIBs can fail without placing the rest of the financial system or public funds at risk of loss," Mark Carney, chair of the FSB and governor of the Bank of England, said in a statement. "This new standard, which will be implemented in all FSB jurisdictions, is an essential element for ending too-big-to-fail for banks."
The FSB is an international coordinating body that works with national regulators and policy makers to promote financial stability.
The standard published Monday will require banks that are considered globally systemically important by the FSB to hold TLAC equal to 16% of their risk-weighted assets starting in January of 2019 and increase their TLAC holdings to 18% by 2022. Banks will also have to hold TLAC that is at least 6% of their exposure as measured by the Basel III leverage ratio by 2019 and 6.75% by 2022.
The FSB estimates that by requiring banks to hold additional debt and equity in the form of TLAC will increase lending rates by 2.2 – 3.2 basis points for the average borrower and have an output cost on GDP of 2 – 2.8 basis points, but that "the benefits of TLAC arise from the reduced likelihood and cost of crises and exceed these costs, with even the most conservative assumptions yielding estimated benefits of between 15 and 20 basis points of annual GDP."
The Federal Reserve Board put out its own TLAC proposal on Oct. 30 that would require domestic GSIBs to hold TLAC in excess of 18% of risk-weighted assets and U.S. operations of foreign GSIBs to hold TLAC equal to at least 16% of risk-weighted assets.