‘Too big to fail’ banks under increasingly intense spotlight

Banking regulators are finalising new measures to deal with ‘too big to fail’ institutions as the finance sector continues to evolve and develop in the wake of the global economic crisis of 2008.

Chaired by Mark Carney, The Financial Stability Board (FSB) coordinates regulation across the Group of 20 economies (G20) and has its sights firmly set on the type of large banks which have been propped up by taxpayers in recent years.

Many hard working families have felt the brunt of the economic crisis, with welfare cuts and reductions of benefits in many developed nations, whilst large banks have been bailed out and supported by governments as they have sought to stabilise economies in uncertain times. Often senior bankers are perceived to have been rewarded for failure, whilst those on the margins of society have footed the bill.

Now Carney and the FSB are sharpening their tools as they look to mark a conclusion to the period of post-financial crisis ‘rule-changing’ which has damaged the image of the banking sector and weighed heavily on tax payers.

Ahead of a G20 summit next week, Carney stated in a letter to government leaders, “The financing capacity to the real economy is being rebuilt and significant retrenchment from international activity has been avoided. Countries must now put in place the legislative and regulatory frameworks for these tools to be used.”

In 2009 the FSB was asked by the G20 to introduce reforms to curtail bankers’ bonuses and increase bank capital requirements, whilst also shining a light on derivatives markets.

The Governor of the Bank of England, Carney has led the charge on behalf of the FSB to decrease the prolificacy of banks perceived to be “too big to fail”, which has been regarded as the last major post-crisis reform.

According to Reuters reporter Huw Jones, at next week’s G20 meeting in Turkey, leaders will be ‘asked to endorse a reform that requires the world’s 30 top banks to issue a buffer of bonds by 2019 that can be written down to raise funds equivalent to 18 percent of risk-weighted assets, if the lender goes bust. The buffer, known as total loss-absorbing capacity or TLAC, is in addition to the minimum core capital requirements a bank must already hold.’

The objective is to create a situation in which big banks which are not run well can fail without causing a financial meltdown in their national economy or in international markets. In other words, to avoid the kind of instability which occurred when the Lehman Brothers bank hit the rocks in 2008.

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