If you don’t remember how devastating the financial crash of 2008 truly was, you probably weren’t old enough or you have enough assets that you personally are too big to fail.
But world financial leaders remember the bailout that had to be issued to Lehman Brothers and the financial collapse that sparked the worse economic times since the Great Recession. When “too big to fail” banks hit rough times, markets all over the world feel the affects. It is for this reason that the Financial Stability Board was created by the Group of 20 Nations following the 2008 crisis – to work towards setting in place rules and regulations to help prevent another crisis without having it affect the taxpayers as it did in 2008.
New Regulations Set in Place by Global Regulators
Basically, what the Financial Stability Board has put forth, is a regulation on how much total loss absorption capital (TLAC) banks must have on hand in the event of problems. The FSB is increasing the totals, and the plan will affect 30 major banks all over the world. Having more capital on hand in case of another financial crisis is a key component to having banks become self-sustaining, rather than dependant on governments and individuals to shoulder the financial burden.
The new rules on TLAC state that banks must acquire a cushion of 16% of their current assets by 2019. The percentage will go up with the years, reaching 18% by 2022. The new regulations will make it more difficult for banks to simply post profits, as they will be required to store money for rough times – requiring them to follow basic financial principles that will not only benefit them, but everyone else as well.
What U.S. Banks are Affected?
The top two U.S. banks that will be the most affected by the ruling are Wells Fargo and JP Morgan Chase. It’s not simple pennies they will need to acquire – it’s billions. Wells Fargo will need to save about $30 billion and JP Morgan Chase will need to save about $25 billion. Other banks that will be affected are America’s Citigroup and Bank of America, and Europe’s HSBC and Barclay’s.
The FSB are allowing four Chinese banks extra time to reach the minimum threshold of 16% – they have until 2025. They are the world’s largest banks and the top three, Agricultural Bank of China Ltd., Bank of China Ltd., and Industrial & Commercial Bank of China Ltd., have to raise an estimated 269 billion euros by 2025.
How Will This Affect You?
The banks who are affected by this ruling are going to have to issue much more debt in coming years in order to increase their capital. At the same time, there may be an increase in interest rates due to the squeeze put on them as well. So while you may be allowed to borrow more, stay aware of how interest will affect any debt you take on from the big banks listed.