Brisbane G20 – FSB – Central Banks and GLAC

August 6th, 2014 by Stephen Jones Leave a reply »

The FSB chairman and Bank of England Gov. Mark Carney sent a letter to G20 Finance Ministers and Central Bank Governors On 4 April 2014 about their plans for the November 2014 G20 summit to be held in Brisbane in November this year.

The letter summarises the priorities for completing reforms by the G20 summit in Brisbane. These are:
- ending too-big-to-fail
- transforming shadow banking
- making derivatives markets safer

Making resolution work in Europe and beyond – the case for going concern loss absorbing capacity was the subject of a recent speech given by Andrew Gracie, Executive Director, Resolution, Bank of England at the Bruegel breakfast panel event, Brussels Thursday 17 July 2014 . see http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech749.pdf

Some more unusually clear source of information on this topic Basel Committee Post Crisis Reform: “Finishing the job!” /em>
Laurent Clerc Director Financial Stability Banque de France

http://ukalma.org.uk/?wpdmact=process&did=Mjc0LmhvdGxpbms

and this presentation:
The FSB Key Attributes of Effective Resolution Regimes Bail-in Framework by Ruth Walters https://www.bfg.pl/sites/default/files/presentation_by_ms._ruth_walters_fsb.pdf

The problem of ‘too big too fail’ of course was discussed as long back as Cannes in 2011.
The FSB will publish a consultation on ‘gone-concern loss-absorbing capacity’ (GLAC), to assess the capacity of G-SIFIs to absorb losses when they fail. The FSB will be seeking agreement at the Brisbane Summit on three issues:
- the criteria that liabilities should meet to be considered as GLAC
- the appropriate amount of GLAC banks should hold
- where this should be held in the banks’ group structure.

An open issue is whether GLAC should be based on risk-weighted assets or on a non-risk-weighted measure. Thee is merit in both approaches. Using a risk-weighted approach would be coherent with Basel III capital requirements; but from an EU perspective, a non-risk weighted concept would be preferable, because this would be compatible with the resolution regime envisaged by the EU’s directive on bank recovery and resolution.

Big firms that straddle national borders present additional problems for regulators:
- Who exactly should take the hit when things go wrong?
- Which regulator should take the lead in sorting it out?
- What happens when different regulators disagree over what to do?
- Whose laws are applied when things go awry?

On the resolution of cross-border banks, the letter states that this must be supported by contractual or statutory approaches for cross-border recognition of resolution actions, including temporary stays on close-out and cross-default rights in financial contracts when a firm enters resolution, and bail-in of debt issued under foreign law. Mike Callaghan, programme director of the G20 Studies Centre at the Lowy think-tank in Sydney, Australia, says “that n agreement on resolving complex, cross-border institutions would be “pretty difficult to achieve by Brisbane”.

The FSB’s agenda will also tackle “shadow banking,” where non-regulated firms act much like banks and could pose a risk to the financial system.

FSB members are divided about the amounts of “bail-inable” debt that should be carried, and the form it should take, Japan officials argue that forcing banks to issue a single type of bail-inable bond ignores the fact that its own sector is heavily deposit-funded. Tokyo has already overhauled its resolution regime, and is not eager to do it again. France, too, seems reluctant to add new requirements for bail-inable debt on top of newly introduced EU-specific resolution rules. China ‘s state-owned banking sector seems clear that public money will be used in a crisis, and would see bail-in as a foreign concept. There is also debate about whether any surplus equity that banks are holding should be counted towards GLAC. Some Asian countries argue for this.

The proposals are likely to forward a numerical range for GLAC coupled with a second “pillar”, leaving considerable discretion to the national regulator when dealing with individual institutions.

The new framework will be applied to the list of 29 G-SIFIs after the consultation is completed and a ‘comprehensive’ impact assessment is
finalised.

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