L bank regulators have laid out rules making clear that holders of hybrid bank debt will take losses if a lender becomes insolvent, rather than taxpayers.
One of the biggest controversies of the financial crisis was how holders of subordinated bank capital debt escaped liability for bank failures even when public funds were being used to shore up faltering institutions.
"The Basel Committee today issued minimum requirements to ensure that all classes of capital instruments fully absorb losses at the point of non-viability before taxpayers are exposed to loss," the Bank for International Settlements said in a statement.
The global banking watchdog’s rules were in line with last August’s draft proposal.
The Committee will publish a keenly awaited draft later this year for dealing with a bank's bonds when capital levels move below minimum requirements but the lender's problems are not yet terminal.
"Tier 2 capital instruments (mainly subordinated debt), and in some cases Tier 1 instruments, did not absorb losses incurred by certain ... banks that would have failed had the public sector not provided support," the committee said.
Under the new rules, holders of the debt will have to agree to the bonds being written down or converted to equity if the bank is no longer commercially viable or needs public aid, the Basel Committee said in its statement.
The Committee said that the rules would be triggered if authorities decided a bank needed a write-off without which it became non-viable, or if there was a decision to make a public sector injection of capital.
Separately, the European Union is pushing through plans to have senior bondholders share in the pain if a bank lands in trouble, leading investors to shun such paper and driving up funding costs for banks.