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G-7 Focus on Bank-Rule Overhaul to Reduce Stability Risks

G-7 Focus on Banking Rules Overhaul to Reduce Stability Risk
U.S. Treasury Secretary Jacob Lew, left, and U.K. Chancellor of the Exchequer George Osborne laugh while posing for the family photo during the Group of Seven finance ministers and central bank governors meeting in Aylesbury, U.K. Photographer: Simon Dawson/Bloomberg

Group of Seven finance ministers and central bankers said they are moving toward revamping banking rules and ensuring that any lender on the brink of failure can be shut down without threatening financial stability.

An “extensive discussion on banking regulation” included talks about how to close banks, European Central Bank President Mario Draghi told reporters yesterday after a G-7 meeting in Aylesbury, near London. The officials had a “clear sense that the different legislations should converge as much as we can on this point,” he said.

European Union leaders began work on a banking union last year to break the cycle of contagion between nations and their lenders that has plagued the euro area in the past three years. A European bank resolution plan is due to be proposed in June.

“It is important to complete swiftly our work to ensure that no banks are too big to fail,” U.K. Chancellor of the Exchequer George Osborne said after leading the meeting. “We must put regimes in place in each of our jurisdictions to deal with failing banks and to protect taxpayers, and to do so in a globally consistent manner.”

The finance chiefs said they also discussed the importance of developing the EU’s banking union and cleaning up lenders’ balance sheets.

Bank Closures

A U.S. Treasury official, speaking to reporters on condition of not being identified, said participants talked about how to move quickly toward a banking union. Treasury officials, led by Secretary Jacob J. Lew, have emphasized in recent weeks that the crisis in Cyprus demonstrated the importance of a full euro-area banking union with a single supervisory mechanism and authority to shut down banks.

The U.S. also has pressed Europe to find ways to unclog bank credit lines to small and medium-sized companies, and that topic was discussed by the ministers, the U.S. official said.

Draghi said the U.S. gave a presentation on how the Federal Deposit Insurance Corp. works when closing banks, “and this is certainly going to be taken into account by our commission.”

The U.S. Dodd-Frank financial overhaul law includes so-called living wills that will lay out how financial firms are to be unwound after a collapse and FDIC resolution authority for failed companies. Some U.S. lawmakers and regulators have expressed concern that Dodd-Frank doesn’t do enough to reduce the risk of future bank bailouts.

The perception among investors that the largest U.S. banks are still too big to fail is “a very big issue,” Federal Reserve Chairman Ben S. Bernanke said May 10 at a banking conference in Chicago. “We will not have completed the goals of financial regulatory reform unless we adequately address this issue.”

Bernanke didn’t attend the G-7 meeting. The Fed was represented by Vice Chairman Janet Yellen.

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