The Financial Stability Board (FSB) unveils new global rules to prevent ‘too big to fail’ banks from being bailed out by taxpayers if they run into financial difficulties.
A recent report from the National Audit office proposed that over £1 trillion of taxpayers’ money was used to subsidise the banks in the UK at the peak of the financial crisis between 2007 and 2008. The new rules will instead ensure that banks’ shareholders and their creditors will be responsible for future losses, rather than the public.
FSB chairman and governor of the Bank of England, Mark Carney, has described the proposed rules as a “watershed” moment. In a BBC interview, he commented: "The banks and their shareholders and their creditors got the benefit when things went well…But when they went wrong the British public and subsequent generations picked up the bill - and that's going to end.
"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.
"Let's face it, the system we've had up until now has been totally unfair…Once implemented, these agreements will play important roles in enabling globally systemic banks to be resolved without recourse to public subsidy and without disruption to the wider financial system."
These rules will require banks to have more capital set aside, effectively as a cushion, which should be worth 15-25% of their assets. This is a big jump compared to what is required by the current rules, the idea being that should another crisis arise, the use of taxpayers’ money to subsidise losses can be avoided.
The rules will go under consultation. It is expected that they should come into effect as an international standard in banking in 2019.