FSB backs bank surcharge and bondholder haircuts

City A.M. Reporter
The world's top banks will face a surcharge to keep them safe and only top-quality capital can be used, a global regulatory task force has said.

A separate measure to wind up banks without destabilising the broader financial system and sparking the need for more taxpayer bailouts foresees imposing losses on bondholders instead, the Financial Stability Board said.

The FSB, tasked by the G20 to overhaul finance rules after the financial crisis, said it backed plans released last month by banking supervisors as part of efforts to deal with so-called too big to fail banks.

Chairman Mario Draghi said top banks will be subject to a surcharge band with only top quality capital acceptable – dashing the hopes of lenders wanting to use lower-quality hybrid debt known as convertible contingent capital, or CoCos.

"Global systemic important banks will be subject to capital surcharges of between 1.0 and 2.5 percent," he told a news conference after chairing an FSB meeting.

"These surcharges will be composed only of common equity," said Draghi, also Bank of Italy governor and due to become European Central Bank president in November.

The surcharge, which will hit banks such as HSBC, Morgan Stanley, Goldman Sachs and Deutsche Bank, would be phased in over three years from 2016, Draghi said.

The surcharge range, composition and timetable remain unchanged from the measure drafted by the global Basel Committee on Banking Supervision in June.

The FSB also approved a separate measure introducing a new global framework of rules and supervisory tool kits to deal with failing banks in a consistent way across borders.

Bank of England Deputy Governor Paul Tucker, also a member of the FSB, told the news conference the new resolution framework foresaw holders of bonds in a bank having to take a loss, or a haircut, if the lender was wound up.

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