Regulators Lack Power to Unwind Too-Big-to-Fail Banks, FSB Says

Global regulators said they still lack the power to impose losses on creditors and wind down too-big-fail-lenders without resorting to public bailouts almost five years after the 2008 financial crisis.

The Financial Stability Board said in a report today that “few jurisdictions have equipped administrative authorities with the full set of powers to resolve banks.” Many countries also lack frameworks to recognize actions taken by foreign regulators in a cross-border crisis, which is a “major weakness,” the FSB said.

Cyprus became a testing ground for investor losses when euro-area authorities last month required restructuring of the country’s two biggest banks as a condition of a 10 billion-euro ($13 billion) rescue. The Cyprus program, billed by European policy makers as a unique case, imposes losses on bondholders and uninsured depositors and was accompanied by capital controls to limit contagion.

“Most of the recommendations that involve actions by national authorities can -- and should -- be implemented now without waiting for additional FSB guidance,” said the FSB, a global group of central bankers and financial supervisors from the Group of 20 nations with headquarters in Basel, Switzerland.

The FSB recommended that nations give local regulators the authority to write down creditors’ claims and give them the ability to make changes to a banks’ organizational structure “where it is necessary to improve their resolvability,” according to the report.

The FSB’s review echoes comments made by International Monetary Fund Managing Director Christine Lagarde, who said the “oversize banking model is still very dangerous” in a speech in New York yesterday.

EU Law

European Union leaders have set a June deadline for governments and the European Parliament to agree on legislation setting out how authorities should handle bank failures, including through so-called creditor bail-ins.

In the absence of such a system, nations have injected 1.7 trillion euros into their banking systems since the 2008 collapse of Lehman Brothers Holdings Inc., according to European Commission data.

The law, “once approved, will represent a major step forward in aligning the resolution regimes of EU member states,” the FSB said.

Other recommendations from the group include introducing powers for regulators to freeze the status of financial contracts during a crisis and ensuring legal structures are capable of resolving non-banks, such as insurance, securities and investment firms.

Before it's here, it's on the Bloomberg Terminal.