Bank of England warns too big to fail is not fixed

Tim Wallace
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BANKS face a new round of capital raising and restructuring to make sure key functions like payments systems are protected in a future bank collapse, a top Bank of England executive warned yesterday.

Although banks have built big capital buffers since the financial crisis, deputy governor Sir Jon Cunliffe warned that the so-called too big to fail problem is still not solved.

Under the new framework big banks will be allowed to collapse when they get in trouble, but crucial capabilities like savers’ deposits and payments must be saved.

This requires a specific type and structure of capital, known as gone concern loss absorbing capital, or GLAC, which has not yet been defined by regulators.

As a result, Cunliffe said banks must be prepared for more changes to their capital structures.

“We are not seeking an amount of GLAC capable of resurrecting any failing bank including the global giants,” he told the Barclays European Bank Capital Summit in London.

“Rather, we are looking for sufficient GLAC to recapitalise the entities carrying out critical economic functions to a level sufficient to regain and maintain market access.”

But so far regulators have not decided how much GLAC is needed, what sort of debt banks can put towards it, or where the GLAC should be based.

Cunliffe also said the Bank of England could get the power to vary the leverage ratio, an extra tool which would let it take more action to stop banks over-extending themselves in boom years.