FSB May Impose Losses on Failing-Bank Bondholders to Avert More Bailouts
July 15 (Bloomberg) -- Jean-Pierre Lambert, an analyst at Keefe, Bruyette & Woods Ltd, discusses the outlook for today's stress-test report by the European Banking Authority. He speaks with Owen Thomas on Bloomberg Television's "Countdown." (Source: Bloomberg)
Global regulators will consider forcing senior bondholders of failing banks to take losses to shield taxpayers from future bailouts, amid concerns the measures may raise lenders’ funding costs.
The Financial Stability Board will meet in Paris on July 18 to weigh draft international measures to guard against a new wave of state rescues. The Basel Committee on Banking Supervision’s plans to toughen capital rules for the world’s most systemically important lenders are likely to be endorsed without major changes, said two people familiar with the talks, who declined to be identified because the negotiations aren’t public.
“The problem with writedowns is that it creates contagion,” Jesper Berg, senior vice president at Denmark’s biggest mortgage bank, Nykredit A/S, said in an e-mail. “That is what we have seen in Denmark. It is somewhat similar to the impact of a rescheduling of Greek debt,” he said. “You would prefer to implement such policies in more peaceful times.”
Banks are warning that plans by regulators for new rules to end the need for bailouts may harm the economic recovery. Michel Barnier, the European Union’s financial services chief, published draft proposals in January to impose losses on failing lenders’ senior bondholders -- a step that firms including Citigroup Inc. and Goldman Sachs Group Inc. have said may make it more expensive for banks to raise funds.
Forcing bondholders to contribute to the costs of resurrecting or closing lenders on the cusp of failure “can be good for financial stability, taxpayers and even bondholders themselves as it can protect institutions against bank runs and value-destroying bankruptcies,” said Sony Kapoor, managing director of policy group Re-Define Europe in London.
World Leaders
World leaders at the Group of 20 nations asked the FSB to agree on measures for winding down failing banks without wider repercussions for the financial system. Such resolution processes can lead to either a bank being broken up and its assets sold on or a lender being resurrected with a smaller balance sheet with higher capital ratios.
The EU and U.S. have moved ahead with plans to force banks to draw up so-called living wills showing how they could be wound down in a crisis.
The FSB is examining “instruments that the resolution authorities of each country should have” and how to tighten co- operation between different national supervisors, Bank of England Deputy Governor Paul Tucker said in a speech in London on June 29. The board will publish a consultative paper this month, Tucker said.
Failing Banks
Bank regulators need greater powers to close failing banks in an orderly fashion during a crisis, the Basel committee said in a report published on July 6.
The FSB is examining how supervisors could impose a “bail in” of bondholders at failing banks, the board said in April.
The board’s work covers “financial stability implications of both contractual and statutory bail-in instruments,” the FSB said at the time. Such an approach would force bondholders to either take a loss on their investment or have it converted into stock, so improving lenders’ ability to absorb losses and to cover the costs of resolution.
“The exercise is difficult, agreements on principles are probably the best to hope for,” said Berg. One “very difficult issue is harmonizing these procedures across countries,” he said. “The Nordic countries, which have similar bankruptcy legislation etc., have tried to do this over the last decade or more but have not succeeded.”
Danish Lenders
The Danish government has taken a lead in forcing senior creditors at crisis banks to take losses. The June 24 collapse of Fjordbank Mors A/S, which had about $1.4 billion in deposits, triggered Europe’s toughest bank resolution rules for a second time and left senior creditors facing a 26 percent writedown on their holdings.
This was the second time that the Nordic country’s bail-in rules had been applied, after the collapse of Amagerbanken A/S’s in February. The lender was broken up by the Danish authorities, with parts of the bank then sold on to BankNordik P/F, based in the Faroese capital of Torshavn.
Under the FSB rules, bondholders would likely face losses that reflect the normal “order of priority” for compensating investors in failed firms, Tucker said last month.
The FSB brings together finance ministry officials, regulators, and central bankers from G-20 nations.
The board asked the Basel committee to work on detailed capital rules for banks judged systemically important to the global economy. The Basel group said last month those lenders should hold as much as 2.5 percentage points in additional capital as part of efforts to prevent another financial crisis.
As many as 30 banks may face some level of surcharges, according to a person familiar with the discussions. The plans will be released for public comment by the end of this month, the group said.
To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net.
To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.
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