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posted on 28 November 2015

Safety Nets For The World's Biggest Banks

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On November 9th the FSB, or Financial Stability Board, added a loss-absorbency requirement for the world's biggest banks to be implemented by 2019. The FSB has included banks it considered "systematically important" and those that made the list, such as JPMorgan Chase & Co. and HSBC, will now need capital or loss-absorbent debt equal to 16% of their risky assets by 2019. Banks that are big enough to fit this requirement will see an increase to 18% of risky assets by 2022.

A further leverage ratio requirement will also be introduced, rising from 6% in 2019 to 6.75% by 2022. The main purpose of these new requirements is to ensure banks will be able to restructure without public recourse in the case of crisis. The final intent of the legislation is to prevent banks from holding each other's risk-absorbing assets. HSBC, Europe's largest bank, has estimated the cost of compliance under these new restrictions could be up to $300 million a year. The total cost of this, including all banks under these regulations, could near $1.19 trillion in new assets. Interestingly enough, however, these rules are unable to legally be enforced unless the regulators of countries approve it.

Eight out of the 20 or so banks that will fall under this proposed legislation are located within the United States. The US Federal Reserve has proposed stricter rules than those proposed by the FSB and believes the cost under the proposed rules would only be able $120 billion. This is about 10% of the total estimated cost by the FSB including nearly half of the banks, which means the other banks in the list have much more ground to cover. Any assets involved with derivatives are not allowed and they must have at least one year of remaining maturity left. Large banks based in emerging markets will face the exact same requirements but will have longer deadlines to meet them.

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