The G20 yesterday gave its approval to a new regime to regulate the world’s largest banks that it said would reduce the risk of a repeat of the “catastrophic failure” of Lehman Brothers that almost pushed the world into a Great Depression.
Almost 30 global banks deemed to be “too big to fail” will have to put aside extra capital and make preparations in the case of their own failure under a new financial regulatory framework agreed by G20 leaders yesterday.
However the head of the regulatory body that has pulled the package of measures together admitted it was “not ideal” that the measures would take effect until the end of next year.
The group approved a proposal by the Financial Stability Board to name 29 banks as globally systemically important financial institutions (G-Sifi), including a number of European banks such as BNP Paribas and UniCredit that are seen as vulnerable to a sovereign debt crisis.
They will have to establish a “resolution and recovery” plan to enable the authorities to wind up a failing bank without triggering a systemic crisis, or requiring taxpayers to fund a rescue package.
Under the FSB package, banks will have to put aside between 1% and 2.5% of risk-weighted assets above the new minimum of 7% that all banks must hold under the Basel III regime agreed earlier this year.
The FSB also announced a new category of very high-risk banks that would have to put aside 3.5% of capital, but said none of the 29 banks had been put in that “bucket”, saying its existence would act as a “disincentive”.
Mario Draghi, the outgoing chairman of the FSB who oversaw the three-year process, said the moves would reduce “moral hazard” – the idea that banks take on excessive risk in the knowledge that taxpayers will bail them out.
“It is a big package with significant potential to alter incentives and reduce the catastrophic risk of failure of a financial institution or the core of the global financial system,” he said.
Implementation of these measures will begin from 2012, although full implementation is targeted for 2019. However the FSB’s secretary general Svein Andresen told Emerging Markets that it would be better if the resolution regime could be implemented immediately.
“Ideally we would want to make these happen today,” he said. “Many of these institutions today are not resolvable in an orderly manner so they need to change and resolution regimes need to change.”
Draghi said it was vital that all jurisdictions implemented the guidelines in the same to avoid creating opportunities for banks to exploit differences – known as regulatory arbitrage.
“It is more than a concern,” he said. “I have a fear that if we had inconsistent international legislation, regulation or implementation, then we could lay the grounds for regulatory arbitrage that will nullify our regulatory efforts.
“The more mobile the underlying financial activity, the bigger the regulatory arbitrage, so we have to be especially vigilant in the area of over-the-counter derivatives, central counterparty platforms, exchange traded funds and so on.”
IMF managing director Christine Lagarde welcomed the deal but echoed Draghi’s warning. “I think more needs to be done on financial regulation particularly on implementation,” she said.
“We need to be cautious about the consistency of implementation around the globe when it comes to financial markets and financial actors.”
Richard Reid, director of research at the International Centre for Financial Regulation, said that regulators faced a “major task” in striking the balance between identifying potential sources of financial failure without sparking further uncertainty.
“This is clearly a very difficult time to be singling out potentially systemically risky banks, given both the fluid nature of the economic and sovereign debt problems in Europe as well as the raft of other regulatory measures on the table at present,” he said.
The Institute of International Finance, which represents many of the 29 banks on the list and which warned that tighter regulation cost growth and jobs, said it would not comment until it had examined the FSB package.
G-Sifis for which the resolution-related requirements will need to be met by end-2012:
Bank of America
Bank of China
Bank of New York Mellon
Banque Populaire CdE
Barclays
BNP Paribas
Citigroup
Commerzbank
Credit Suisse
Deutsche Bank
Dexia
Goldman Sachs
Group Crédit Agricole
HSBC
ING Bank
JP Morgan Chase
Lloyds Banking Group
Mitsubishi UFJ FG
Mizuho FG
Morgan Stanley
Nordea
Royal Bank of Scotland
Santander
Société Générale
State Street
Sumitomo Mitsui FG
UBS
UniCredit Group
Wells Fargo