February 3, 2015 / 4:26 PM / 5 years ago

Big banks face $500bn "bail in" bonds bill - S&P

LONDON, Feb 3 (Reuters) - The world’s 30 biggest banks will have to issue more than $500 billion in bonds to comply with proposed global rules aimed at shielding taxpayers from the risk of future banking failures, credit rating agency Standard & Poor’s (S&P) said on Tuesday.

Leaders of the Group of 20 economies (G20) have proposed that 30 so-called globally systemic banks (G-SIBs) such as Goldman Sachs, HSBC and Societe Generale should hold a buffer of bonds equivalent to between 16 and 20 percent of their risk-weighted assets such as loans, perhaps by 2019.

The proposal was agreed in principle at a G20 summit last November, with a Feb. 2 deadline for consultation on the detail. Banks have cautioned the buffer could make it harder for them to lend to the economy and the G20 has not so far put a figure on the likely scale of the implied debt issuance.

The G20 plan is seen as the last major regulatory measure to tackle too-big-to-fail banks, whose scale effectively means governments have no alternative to stepping in if they hit problems, forcing regulators to impose particularly tough safeguards in the hope of avoiding the havoc wreaked by the failure of Lehman Bros in 2008.

S&P said adequate disclosure will be needed to give investors confidence to buy the bonds, which are similar to the “co-co” bonds which some banks have already issued and which are “bail-inable”, or convert into equity under certain circumstances, thus injecting funds to recapitalise a lender or at least keep its vital bits going.

S&P said the 30 banks will need to issue the bonds, dubbed “total loss absorption capacity” or TLAC bonds, in the next four to five years.

S&P is itself consulting on how TLAC will influence how it rates banks, who have already tapped investors for billions of dollars to boost their finances in the face of increased regulatory scrutiny.

Too-big-to-fail banks have enjoyed cheaper funding due to the belief they won’t be allowed to collapse, but this boost is being eroded as new regulation like TLAC is phased in.

The $500 billion estimate is based on the lower end of the 16 to 20 percent range and would be double this sum if the upper range was imposed.

The 16 G-SIBS based in Europe account for three quarters of the estimate, S&P said.

“We believe the proposed minimum TLAC requirements would have been enough to cover the government-funded recapitalisation needs of G-SIBs in the recent crisis and that they have been calibrated to instil market confidence,” S&P said. (Editing by David Holmes)

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