Too big to fail banks need to boost capital by $679B

 The biggest banks in the world need to raise almost €475 billion ($679 billion) over the next seven years so that shareholders and the creditors, rather than taxpayers, will bear the burden if they collapse.

Officials at the Financial Stability Board, a group of international regulators led by the Bank of England's governor Mark Carney issued a new set of rules today on the banks considered "too big to fail."

• 13 Europe banks told to fix finances after flunking review
• Federal Reserve proposing big U.S. banks boost capital cushions

The hope is that this will mean banks are less likely to collapse in the way that Lehman Brothers did, demanding a bailout from taxpayers and roiling markets

"It is important to recognize that success in ending too big to fail may never be absolute because all financial institutions cannot be insulated fully from all external shocks," Carney said.

Carney said many of the key reforms already have been implemented decisively and promptly and the FSB has now outlined plans to wind down troubled banks in an orderly way.

Chinese banks

No Canadian banks are among the globally systemically important banks listed by the FSB. That list includes huge banks such as HSBC, JPMorganChase, Deutsche Bank and Santander.

A significant amount of fund-raising will have to take place among Chinese banks, including Agricultural Bank of China, Bank of China and Industrial and Commercial Bank of China. China's government recently has eased capital requirements hoping to stimulate the economy.

The G20 tasked the FSB in 2009 with introducing reforms from increasing bank capital requirements to shining a light on derivatives markets and curbing bankers' bonuses.

G20 leaders meeting next week in Turkey will be asked to endorse a reform that requires the world's 30 top banks to issue a buffer of bonds by 2022 that can be written down to raise funds equivalent to 18 per cent of risk-weighted assets, if the lender goes bust.

$1.58 trillion to raise

Under the worse case scenario, the banks would have to issue a total of €1.1 trillion euros ($1.58 trillion Cdn) in bonds.

The bulk of this, or $1.08 trillion, would be in China and other emerging markets whose banks have been given an extra six years until 2028 to comply, the FSB said.

Banks could also plug the shortfall by issuing shares or retaining earnings.

"It is clear the benefits far exceed the costs of introducing this standard," Carney said.

Banks moved early to meet tougher capital requirements since the crisis to reassure investors about their solvency.

But Svein Andresen, FSB secretary-general, said he does not expect banks to necessarily rush headlong to meet TLAC rules early.

Matching rules

"Many banks have told us they will let existing liabilities run off and replace them in the course of normal refinancing," Andresen said.

The EU is applying a similar requirement on all banks based in the 28-country bloc with rules compatible with the total-loss-absorbing capacity set by the FSB. 

Like the U.S., Canada is applying similar rules to all its banks. Canadian banks weathered the financial crisis in part because of stricter regulation, including capital rules. The current assets-to-capital ratio will soon be replaced by a ratio based on a method agreed upon by regulators in Basel.

"Countries must now put in place the legislative and regulatory frameworks for these tools to be used," Carney said in a letter to G20 leaders.