G-20 summit delivers agreement on TLAC

Leaders approve standard for total loss-absorbing capacity, but consensus on cross-border cooperation remains hazy; Carney looks ahead to next phase of reforms

Mark Carney

Leaders of the G-20 group of nations have endorsed proposals for a standard governing total loss-absorbing capacity (TLAC), in an effort to move closer to ending the problem of ‘too-big-to-fail' banks.

The proposals, set out by the Financial Stability Board (FSB) on November 10, aim to allow global banks to be resolved without sending catastrophic shockwaves throughout the financial system.

Under the draft standard, banks would have to hold 16–20% of risk-weighted assets as TLAC, comprising regulatory capital and bail-inable debt.

In the days running up to this weekend's summit, FSB chairman Mark Carney said an agreement on TLAC would mark a turning point in efforts to end too-big-to-fail.

Too-big-to-fail may never be fully eliminated, Carney noted in a letter to G-20 leaders, as no bank can be fully insulated from external shocks. "But these proposals will change the system so that individual banks bear the costs of their own actions and the consequences of the risks they take," he said.

A second area of importance Carney identified was a cross-border agreement on stays in derivatives contracts, aimed at preventing market participants from pulling their money out of a bank as soon as it fails.

A communique issued by the G-20 following the meetings was more reserved when it referred to cross-border co-operation than it was about TLAC. "We encourage jurisdictions to defer to each other when it is justified, in line with the St Petersburg Declaration," the G-20 said.

The St Petersburg Declaration was signed by G-20 leaders following the G-20 summit held there last year. In it, leaders committed to co-operation across a broad range of economic issues, including reforms to derivatives markets.

A spokesman for the FSB clarified that although Carney had identified resolution stays as a major area for future work, it had not been on the table at the G-20 summit.

Instead, the FSB is working with the International Swaps and Derivatives Association to increase the number of signatories to a protocol on stays unveiled last month. National jurisdictions have a role in nudging their banks towards signing.

The future of reform

Speaking on November 17 at the Monetary Authority of Singapore, Carney outlined his vision for the future of financial regulation.

He said current efforts at reform had delivered a "safer, simpler and fairer system", giving the FSB room to look ahead. The next stage, he said, "must be supported by pillars of diversity, trust and openness".

Part of restoring trust, Carney said, was appropriate rules on bonuses. Carney added his voice to other Bank of England officials, notably Andrew Bailey, who have said EU plans to cap bonuses damages regulators' ability to incentivise good behaviour by putting bonuses at risk.

"It is unfortunate, for example, that new European rules to cap bonuses... have the undesirable side effect of limiting the scope for remuneration to be cut back," Carney said.

"This makes the case for additional reforms to ensure that the burden of excessive risk-taking and misconduct by staff can still be borne by those staff," he added.

This article was originally published in sister title Central Banking.