“You might say, “well, the world’s private bankers could have held more capital than what their government/central bankers told them to hold.” That’s just not true, economically. No large, publicly-traded bank could hold materially more capital than their government regulators demanded,…
…because the competitive marketplace would dictate they could not produce adequate returns on capital and would therefore be pushed out of business by other bankers who would hold just enough, but no more capital. The article below downplays the bank capital issue, but the amazing reality is the world’s Too Big to Fail Banks, after all these years, are still undercapitalized to the tune of $1.2 trillion!!! Restructuring debt (so that it is clear that it will absorb losses before depositors and government guarantors like the FDIC) is a big deal. And to me it shows clearly, it was (as Greenspan said plainly in his 2009 paper “The Crisis”) the world’s central bankers (our governments), who deliberately chose to keep our banks undercapitalized, such that many would not survive a once-or-twice in a century financial crisis, without support of their sovereign governments. In other words, the bank failures and bailouts were caused by deliberate decisions by our governments/central bankers and NOT by private bankers.”, Mike Perry, former Chairman and CEO, IndyMac Bank
“Banks have been hit with another big, scary number in the battle to end “too big to fail”: $1.2 trillion. This is the headline number for how many bonds the world’s biggest lenders need to meet rules unveiled on Monday.”, Paul J. Davies, “Small Price for Banks to Combat ‘Too Big To Fail’”, The Wall Street Journal, November 10, 2015
Small Price for Banks to Combat ‘Too Big To Fail’
European, U.S. banks should be able to meet new bond requirements at relatively little extra cost
Extra capital buffers charged for things like being globally systemically important, which for HSBC already means an extra 2.5% equity requirement, aren’t part of the calculation regarding the amount of equity and debt banks must have to cover very large losses. PHOTO: TIM IRELAND/ASSOCIATED PRESS
By Paul J. Davies
Banks have been hit with another big, scary number in the battle to end “too big to fail”: $1.2 trillion. This is the headline number for how many bonds the world’s biggest lenders need to meet rules unveiled on Monday.
In reality, however, many European and U.S. banks don’t have a big hole to fill to meet requirements for bonds that can take losses or be converted into equity. Legal changes in much of Europe, or natural replacement of maturing senior debt with bonds that are only marginally different, will get them most of the way there.
For shareholders, then, the fallout won’t be great. But there is danger if banks breach the new rules: Dividends will be automatically restricted until they are met again.
The one big surprise in the rules on Total Loss-Absorbing Capacity was that the four biggest Chinese banks no longer get an exemption, although they do have six more years than developed market lenders to meet the requirements.
The rules are designed to ensure that any big bank can and will cover very large losses with existing equity and debt, minimizing the chances of taxpayers being called upon to bail it out.
To achieve this, banks must have equity and various kinds of bonds that amount to at least 16% of their risk-weighted assets by 2019 and then 18% by 2022. Chinese banks have until 2025 and 2028.
However, some equity doesn’t count toward this percentage. Extra capital buffers charged for things like being globally systemically important, which forJ.P. Morgan and HSBC already means an extra 2.5% equity requirement, aren’t part of the calculation.
Eligible bonds can include junior debt, such as contingent convertible bonds, and senior unsecured debt so long as it will definitely take losses before depositors and derivatives liabilities.
In the U.S. and U.K., senior bonds issued by a holding company (rather than an operating bank that holds deposits) are already mostly eligible. U.K. banks have begun issuing more debt from holding companies, while Swiss groups have created holding companies to do that job.
In Germany, where banks don’t have holding companies, new legislation will make all bank senior debt junior to depositors and derivatives. Analysts expect most other European countries to do the same.
Taking all of this into account, European and U.S. banks currently need to issue extra debt worth about $280 billion by 2019 and $455 billion by 2022, according to the Bank for International Settlements.
The four Chinese banks face a bigger challenge: They must raise $287 billion by 2025 and $378 billion by 2028.
For Europeans, the cost of this extra debt is limited: on average just 2% of forecast earnings for 2017, according to Citigroup analysts.
Ultimately, nothing can guarantee that no bank will ever be bailed out again. But these rules will help to reduce the chances dramatically—and for only a small price. That can’t be bad.