Financial Stability Board spells out too big to fail solution

The parochial boundaries of Australia's emerging choices on minimum bank capital received a new shape this week, with the formal release by the Financial Stability Board of policy proposals covering "a set of principles and a detailed term sheet on the adequacy of loss-absorbing and recapitalisation capacity of global systemically important banks (G-SIBs)."

The FSB said the proposals (which respond to the call by G20 Leaders at the 2013 St Petersburg Summit for proposals by the end of 2014) were developed in consultation with the Basel Committee on Banking Supervision.

It said they would, once finalised, "form a new minimum standard for 'total loss-absorbing capacity' which should provide home and host authorities with confidence that G-SIBs have sufficient capacity to absorb losses, both before and during resolution."

For Australian banks, this document accentuates the debate on capital considered by the Financial System Inquiry, which may have a bias toward common equity over roping in 'bail in-able' bonds placed by banks.

The second is now effectively a medium of capital in the US, thanks to Dodd-Frank, and this is going global via the FSB policy lead.

Deloitte's risk and regulatory leader, Kevin Nixon, said the mix of common equity versus hybrids versus subordinated debt versus senior unsecured would "take some thinking about."

Nixon served as managing director for regulatory affairs at the Institute of International Finance in Washington from 2012 until recently.

In Australia, the industry and regulators may "for clarity, lean toward a contractual solution," Nixon said. But "for efficiency and certainty," regulators may "move to a statutory solution."

The FSB's outline on TLAC at this stage "applies to G-SIBs only," he said. "Any D-SIB needs to think about it the right way and pay attention to this."

One detail, Nixon said, is that "any D-SIB may need to make a deduction for any G-SIB bank bond they buy."

David Murray's FSI panel "may recommend common equity be the solution. That will put Australia on a far more conservative posture," he said.

Nixon said TLAC "is a fundamental change to the way people think about bank capital. It's a re-thinking of the hierarchy of the Basel capital structure."