LONDON (Reuters) - Britain’s banks will have until 2020 to build crisis funds to shield taxpayers from having to bail out failed lenders again, the Bank of England (BoE) said on Friday.
The Bank was setting out new rules for how 400 banks and building societies will in total have to hold an additional 223 billion pound cushion of loss-absorbing bonds.
The net shortfall against that target is currently about 27 billion pounds across the 400, nearly all of it at the biggest lenders such as HSBC HSBA.L, RBS RBS.L, Barclays BARC.L and Lloyds LLOY.L, which will have to hold bonds equivalent to at least twice their current minimum capital requirements.
The bonds would be written down to top up depleted core capital buffers in the event of a failure, thereby giving regulators time to close or restructure the bank in an orderly way and avoid the market mayhem of Lehman Brothers’ 2008 crash.
The rules, published for consultation, are based on a European Union law that will require all banks across the 28-country bloc to hold the extra buffer known as minimum requirement for own funds and eligible liabilities, or MREL.
The Bank estimated the net shortfall of such funds is currently 26 billion pounds for the biggest banks, for which the MREL will cost some 1.4 billion pounds a year to service.
The vast majority of MREL requirements will be met by re-issuing or rolling over 195 billion pounds of existing debt at banks over the next four years to make it eligible.
The new rules are seen by policymakers as the final piece of banking regulation since the 2007-09 financial crisis to end so-called “too big to fail” banks.
“The implementation of MREL is a crucial step forward to ensuring that any bank, large or small, carries sufficient resources to be resolved in an orderly way, without recourse to public subsidy and without disruption to the wider financial system,” BoE Governor Mark Carney said in a statement.
The aim is to ensure shareholders and bondholders bear the losses when a lender goes bust. The UK government poured 115 billion pounds into banks to keep them afloat during the financial crisis.
EU moves to put creditors and not taxpayers on the hook for bank failures were evident on Friday when Italians rushed to sell their bank bonds after taking fright at losses imposed on investors in four small lenders which had to be rescued last month.
Andrew Tyrie, chairman of the Treasury Select Committee, said UK banks that complained about the new requirement should remember that safer lenders are more attractive to investors.
“What’s more, they will have ample time to adapt to these requirements,” Tyrie added.
David Strachan, head of Deloitte’s regulatory strategy centre in Europe, said the Bank’s proposals set stricter criteria than EU law for what types of debt could be included in MREL.
The Bank said depositors could, in some circumstances, also bear losses on amounts held in accounts above the 75,000 pounds that is automatically insured under EU rules.
Banks will be told in the second quarter of 2016 what is the indicative amount of MREL they must hold by January 2020.
The lenders will be given some flexibility as to how they will reach that level, the Bank said.
HSBC, Barclays, RBS and Standard Chartered have already been classified among the 30 global systemic banks which must hold a layer of bonds know as TLAC. The Bank said their level of MREL would not be higher than the globally-set TLAC, but that they must begin complying by the 2019 deadline.
Editing by Andy Bruce and Mark Potter
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