LONDON, July 6 (IFR) - The world’s biggest banks will need to rely on cooperation between the regulators of the jurisdictions where they operate to ensure they are structured and capitalised most efficiently, after few changes were made in a final report on how their subsidiaries should hold capital.
The Financial Stability Board, which coordinates financial regulation for G20 countries, issued guidance ahead of the G20 leaders’ summit in Hamburg on how the 30 global systemically important banks (G-SIBs) should account for internal total loss-absorbing capacity (TLAC) across their groups.
It urged regulators not to “double-count” internal TLAC, because that would force G-SIBs to hold more capital than necessary across their groups.
Host authorities should take into account a bank's capital instruments "with a view to ensuring that the material sub-group is not required to issue additional internal TLAC beyond the requirement set by the host authority,” the FSB said.
Initial proposals were put out for consultation in December. These said TLAC at subsidiaries should be between 75% and 90% of what would be required if the subsidiary were an independent entity, to be determined by host and home regulators in cooperation.
The treatment of internal TLAC, at subsidiary level, highlights the risk of balkanisation of financial regulation. Critics say if countries insist on different approaches it could fracture the global rules on bank capital and other matters the FSB is trying to coordinate.
Internal capital would be called on by a host regulator of a G-SIB if the parent got into trouble and needed recapitalising. The FSB favours G-SIBs being resolved by their home country regulator, which would then direct other regulators where subsidiaries operate.
The US, however, requires subsidiaries of foreign-owned banks with more than US$50bn in assets to set up intermediate holdings companies that are fully capitalised. The European Union responded in November, calling for non-EU G-SIBs to form similar IHCs by 2019 for their European operations.
The FSB has outlined the process for identifying “material sub-groups” that would need to issue internal TLAC, as well as how much their parents should hold, what it should consist of, and when and how it might be triggered.
The FSB recommended such debt be issued under the law of the jurisdiction where a subsidiary is based rather than the home authority where the group is headquartered, so it can be triggered easily on resolution.
The FSB also set out principles on how the home regulator of a G-SIB and host authorities should cooperate and coordinate in the event that a bank, or one of its subsidiaries, needs to be resolved.
The FSB did revise some recommendations. It said a host regulator may still require a subsidiary to carry sufficient capital, but that this should not make running such cross-border groups capitally inefficient.
The FSB said host regulators should also consider how much or how little surplus TLAC at the group level was available to be deployed for recapitalisation at the subsidiary level as necessary in the event of losses.
“The issuance of internal TLAC instruments should ... support the resolution strategy and the passing of losses and recapitalisation needs to the resolution entity," the FSB said. If issuance is unlikely to achieve this then home or host authorities should require the G-SIB to make changes to improve resolvability, it said.
Elke Konig, chair of the European Single Resolution Board who chairs the FSB’s resolution steering group, said work still needs to be done to ensure consistency.
“The effective implementation of the guidance papers will be another important step in making G-SIBs resolvable and ending 'too-big-to-fail'," Konig said.
“Significant work remains to remove obstacles to cross-border resolution and to implement the resolution reforms in a comprehensive and consistent manner across all sectors, including for central counterparties and insurers.”
A separate FSB report said "effective information sharing arrangements ... were not in place for all G-SIBs”, highlighting nine of the 30 that did not have such arrangements. The FSB said it would also consult on the execution of "bail-in" over the coming year. (Reporting by Christopher Spink)