Global Watchdog to Set Creditor-Loss Rules for Failing Banks

Global regulators said they would seek to protect taxpayers from having to bail out failing banks by drawing up international rules on creditor losses.

The Financial Stability Board will propose rules next year to ensure that big banks and other too-big-to-fail financial institutions hold subordinated debt and other liabilities that can be written down in an emergency. The group will also address provisions in derivatives contracts that can deepen crises.

Regulators across the world have been grappling since the 2008 financial crisis to make markets more resilient and to take taxpayers off the hook for rescues. European Union nations alone provided 1.7 trillion euros ($2.2 trillion) of support to their banking systems since the collapse of Lehman Brothers Holdings Inc., according to EU data.

“While much has been accomplished over the past few years, more needs to be done,” Bank of England Governor Mark Carney, the FSB’s chairman, said in a statement. “Cross-border cooperation agreements must be struck, and policies for gone concern loss absorbing capacity should be developed.”

Carney said the FSB would ensure compatibility of steps by different nations, and welcomed EU progress toward adopting rules for how regulators can intervene at crisis-hit lenders.

The EU plans “substantively implement” overarching bank-failure principles published by the FSB in 2011, Carney said.

Derivatives Contracts

In addition to rules that would force investors to take losses before taxpayers when a bank fails, the FSB will also focus on removing practical impediments to safely winding down banks, and on ensuring that national rules don’t clash, Carney told reporters today in London.

This will include addressing clauses in derivatives contracts that allow large firms to terminate agreements when their counterparty gets into difficulty, deepening the stricken firm’s plight.

By the end of 2014 global regulators will “develop proposals for contractual or statutory approaches to prevent large-scale early termination of financial contracts,” the FSB said in a report on its future plans published today.

Authorities will encourage the International Swaps and Derivatives Association and other industry groups to review such provisions in their model contracts, according to Carney, who said “progress” was needed on these measures.

The FSB today also called for greater information-sharing between national regulators, and urged them to coordinate bank-structure rules, to prevent clashing requirements.

The FSB plans follow moves by global regulators to force banks to hold more capital that they can draw on to absorb losses in their day-to-day activities.

Large international banks have raised about $500 billion in fresh capital since 2009 and are moving closer to complying with global standards set to phase in by 2019, Carney said.

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