The end of „Too-Big-to-Fail“ banking era

World leaders are set to endorse plans by regulators to end the era of too-big-to-fail banksand backed proposals to wrap up sweeping reforms of rules for the global banking system.

The Financial Stability Board, created by the Group of 20 nations after the 2008 credit crunch, last week put forward a plan on how the world’s biggest banks can collapse without taxpayer bailouts. The proposals, which force bond investors to take losses if banks fail, are due to come into effect in two steps starting in 2019.

The rules for “total loss absorbing capacity” comes on top of measures that have forced banks to hold many times the amount of equity they had in the run-up to 2008. The FSB has also ordered lenders to issue bonds that can stop paying coupons and can be written off or converted into shares to preserve capital.

The Basel Committee on Banking Supervision, which sets international standards for banking regulation, said on Friday that its post-crisis reforms are set to be completed next year with new rules for trading books and for ways to calculate the riskiness of assets.

Under the rules approved by the G-20, the world’s 30 biggest banks will have to have outstanding liabilities and instruments “readily available for bail in” equivalent to at least 16 percent of risk-weighted assets in 2019, rising to 18 percent in 2022. Chinese banks, among the world’s largest, have been given extra time to issue the securities they need to meet the FSB’s requirements. The three biggest -- Agricultural Bank of China Ltd., Bank of China Ltd., and Industrial & Commercial Bank of China Ltd. China Construction Bank Corp., was added to the FSB’s list last month.

All this will reflect very strongly on the potential for a net profit of banks in the first half of 2016. It will reflow off-balance sheet assets and internal credit-rating rules, which will reflect directly on the spreads on the debt market, especially in corporate bonds and debt derivatives. For smaller banks is possible wave of mergers and acquisitions.

G.Hristov / Head of Fundamental Analyzes

(by data from Bloomberg)