LONDON Aug 21 Government leaders are expected
to agree in November that the world's top banks must issue
special bonds to increase the amount of capital which can be
tapped in a crisis instead of calling on taxpayers to come to
the rescue, industry and G20 officials said.
The bonds, known as "gone concern loss absorption capacity"
or GLAC, are seen by regulators as essential to stopping the
world's 29 biggest lenders from being "too big to fail".
The plans are being drafted by the Financial Stability
Board, the regulatory task force of the Group of 20 economies
which declined to comment ahead of a G20 summit in November,
when G20 leaders will discuss the reform before it is put out to
The reform would put in place the final major piece of G20
regulation on banking as the global body turns to a
"post-crisis" agenda of fostering economic growth and bedding
down the rules it has approved.
There had been unease in Asia and parts of Europe over how
big the bond issues need to be to provide this cushion but there
is now a new optimism amongst bankers and regulators that the
G20 will reach a deal in November.
"The industry is definitely in favour of making resolution,
supported by an appropriately flexible concept of GLAC, work.
That is the key pending aspect on ending too-big-to-fail," said
Andres Portilla, director of regulatory affairs at the Institute
of International Finance, a Washington-based banking and
"What is likely to happen is that there will be a
consultative proposal, but without all the detail that a lot of
people would like," Portilla added.
However, a G20 source said a deal was not only expected but
would also be more detailed than some parties anticipate, which
is essential for conducting a thorough impact assessment before
finalising the rules.
"The authorities and the FSB are working to have a proposal
that will contain sufficient granularity of numbers to be a
meaningful consultation and quantative impact study to calibrate
the final rule," the source said.
Top banks expect they will have to hold GLAC bond capital
equivalent to about 10 percent of their risk-weighted assets on
top of their core capital buffers which currently stand at
around 10 percent. But they hope for some leeway if they can
show that they can already be wound down smoothly in a crisis
because of simplified structures.
The G20 source poured cold water on this, saying regulators
believe all the world's top 29 banks earmarked for tougher
supervision will need a significant cushion of such so-called
"bail-in" bonds for some time to show they can be shut without
Regulators ultimately want to price bank debt better and end
the cheaper funding that too-big-to-fail banks enjoy because
markets assume governments would never allow them to collapse.
END OF HEAVY LIFTING
Efforts by the authorities so far are having an impact.
"We have been lowering our systemic support assumptions for
banks or changing their outlooks to 'negative' to reflect the
ongoing effort by governments to try to eliminate that support,"
said Johannes Wassenberg, managing director of banking at
Moody's credit rating agency in Europe.
In May, Moody's lowered its outlook to 'negative' on more
than 80 banks in the European Union after the bloc approved a
law requiring banks to hold a buffer of potential bail-in debt
"Adopting GLAC is the final chapter in reforming the
condition of banks," said Thomas Huertas, a former UK banks
supervisor and now a regulatory consultant with EY.
The plans for bail-in bonds are among the last of what G20
officials call the "heavy lifting" on banking industry reforms
that came in the aftermath of the financial crisis.
(For FACTBOX, "G20 gears up for heavy bout of financial
rulemaking", click on )
With much of the work on defining how to make banking safer
completed, the G20's focus will shift to implementation of its
rules and behaviour at banks after lenders were fined for
rigging the Libor interest rate benchmark, with similar
allegations in the currency markets now emerging.
"After dealing with too big to fail, the next big section
for the G20 is conduct and there will be a shift in attention to
that issue," Huertas said.
(Editing by Greg Mahlich)