Carney Seeks Middle Ground on Bank Crisis Writedown Rules

Mark Carney, chairman of the Financial Stability Board, is trying to forge a global compromise on liabilities banks must hold that can automatically be written off in a crisis.

The Bank of England, which Carney also heads, and U.S. agencies want at least 20 percent of banks’ liabilities to consist of instruments such as unsecured debt that can be wiped out if the lender fails, according to three people with knowledge of the matter. Some European countries including France are pushing for a level of zero to 10 percent, said the people, who requested anonymity because the negotiations are private. Japan is also seeking to scale the rule back, one of the people said.

The FSB, which consists of regulators and central bankers from around the world, has about four months to complete the proposed rules before presenting them to a meeting of the Group of 20 nations in Brisbane in mid-November. The writedown guidelines are part of a package of measures designed to make sure taxpayers are no longer on the hook when banks fail.

“The clash points to the fundamental incompatibility of the way, on the one hand, that the U.S and the U.K. think about banks, which is that they are private companies that should fail at a cost to the private investor, versus the European Union, Japan, and other nations that see their big banks as national champions,” said Karen Shaw Petrou, managing partner of research firm Federal Financial Analytics Inc.

Junior Debt

The FSB plans would force banks to issue junior debt and other securities that could clearly be written down in a crisis, potentially driving up their funding costs. Carney has said that the rule, known as the gone-concern loss absorbing capacity measure, or GLAC, is needed to make sure that powers for regulators to impose forced losses on unsecured creditors have real bite, as banks will have a guaranteed minimum amount of liabilities that can take a hit.

“A high GLAC requirement certainly implies a cost for banks, as it would require them to have more expensive capital or long-term debt,” Gilbey Strub, head of resolution at the Association for Financial Markets in Europe, said by telephone. “That implies costs both in terms of the yield for investors and in terms of the practicalities of issuing it.”

The measure “will increase confidence among home and host authorities that there is a minimum amount of resources available in resolution to absorb losses,” Carney said in a letter to G-20 finance ministers and central bank governors earlier this year.

Japanese Banks

“Japanese banks don’t need the GLAC rule because our business model is different from those of Western banks,” Masayuki Oku, chairman of Sumitomo Mitsui Financial Group Inc., told Bloomberg News at a forum in Tokyo today, without elaborating. He said he’s explaining his stance to Japanese authorities and hopes they consider it during the talks with global counterparts.

“Our bank is managing capital based on Basel III and there is no way to assess the overall impact from other measures if they are introduced,” Oku said, in reference to global capital standards set by the Basel Committee on Banking Supervision. Sumitomo Mitsui is Japan’s second-biggest bank by market value.

The “biggest risk for Japan’s big banks in dealing with tougher global financial rules is that they would be forced to accumulate excessive capital, which would end up hurting banks’ businesses in many ways,” Oku said.

Tougher Requirements

The U.K. has warned that banks would face tougher capital requirements if talks fail on GLAC.

“At a very minimum, there must be sufficient GLAC to restore minimum capital requirements,” Andrew Gracie, the Bank of England’s executive director for resolution, said at an event in Brussels last week..

“For a bank that has undergone resolution to command market confidence, it is likely to need at least as much capital as other banks in the market,” he said, according to a copy of his remarks posted today on the Bank of England website. “It would be sensible therefore” for globally systemic banks “to maintain sufficient GLAC to be able at least to restore fully regulatory capital buffers above capital minima.”

The FSB is also discussing what kind of liabilities should be considered as eligible under the GLAC rules and at which level in a bank’s corporate structure the instruments should be issued.

Existing Debt

“A big outstanding question is how far GLAC will have to be made up of subordinated securities,” Strub said. “The knock-on effect for banks could be that they have to call in some existing debt and replace it with GLAC compliant securities, which could cost millions in fees.”

AFME represents lenders including Deutsche Bank AG, BNP Paribas SA and HSBC Holdings Plc.

“My sense is that some regulatory regimes, while supportive of the FSB’s efforts to bring clarity and order to this area, are impatient with the rate of progress,” said Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland.

“No doubt the expression of such frustrations can be seen as an attempt to stimulate faster progress on an international agreement,” Reid said.

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