New Too Big To Fail Banks Rules Proposed

'Too big to fail' bank rules unveiled by global regulators

The rules, created by the Financial Stability Board (FSB), a global regulator, will require big banks to hold much more money against losses.

Mark Carney, FSB chairman and governor of the Bank of England, said the plans were a "watershed" moment.

He said it had been "totally unfair" for taxpayers to bail out banks after the financial crisis of 2008 and 2009.

"The banks and their shareholders and their creditors got the benefit when things went well," he told the BBC.

"But when they went wrong the British public and subsequent generations picked up the bill - and that's going to end".

Mr Carney explained that the new system would ensure that bank shareholders, and lenders to banks such as bondholders, would become first in line to bear the brunt of future losses if banks could not pay out of their own resources.

"Instead of having the public, governments, [and] the taxpayer rescue banks when things go wrong; the creditors of banks, the big institutions that hold the banks' debt - not the depositors - will become the new shareholders of banks if banks make mistakes."

 The proposed new rules, which are up for consultation and should take effect in 2019, require "global systemically important banks" to hold a minimum amount of cash to ensure they will be able to survive big losses without turning to governments for help.

The capital set aside should be worth 15-20% of the bank's assets, the FSB said. That is a far bigger cushion against losses than is required by current banking rules.

My view:

This seems to be one of the most sensible ideas in the aftermath of the financial crisis 7 years ago.

In fact, this blogger proposed higher capital asset rules several years ago in this post found here.

One of the biggest problems with the proposal is its implementation date.  2019 is over 4 years away, and there are signs that another financial crisis is already brewing.

While one hopes for a resolution that will not rob taxpayers a second time, one must prepared for a negative outcome given the length of time that has already passed in which "too big to fail" banks have become even bigger in some countries.

In this writer's view, holding cash and precious metals outside the banking system seems to be a wise idea to minimize the fallout of a low probability, high impact banking event.