Global banks may have to scrap dividends and rein in bonuses if they breach new rules designed to ensure that creditors rather than taxpayers pick up the bill when big lenders collapse.
Mark Carney, chairman of the Switzerland-based Financial Stability Board and Bank of England governor, said the rules, proposed yesterday, marked a watershed in putting an end to taxpayer bailouts of banks considered too big to fail.
"These agreements will play important roles in enabling globally systemic banks to be resolved (wound down) without recourse to public subsidy and without disruption to the wider financial system," Mr Carney said in a statement.
After the financial crisis in 2007-2009, governments had to spend billions of euros of taxpayers' money to rescue banks that ran into trouble and could have threatened the global financial system if allowed to go under.
Since then, regulators from the Group of 20 economies have been trying to find ways to prevent this happening again.
The plans envisage that global banks like Goldman Sachs and HSBC should have a buffer of bonds or equity equivalent to at least 16pc to 20pc of their risk-weighted assets, such as loans, from January 2019.
These bonds would be converted to equity to help shore up a stricken bank. The banks' total buffer would include the minimum mandatory core capital requirements banks must already hold to bolster their defences against future crises.
The new rule will apply to 30 banks the regulators have deemed to be globally "systemically important," though initially three from China on that list of 30 would be exempt.
G2O leaders are expected to back the proposal later this week in Australia. It is being put out to public consultation until early February.
David Ereira, a partner at law firm Linklaters, said that on its own the new rule as proposed would not end "too big to fail" banks and that politically tricky details still had to be settled.
Mr Carney was confident the new rule would be applied as central banks and governments had a hand in drafting them.
"This isn't something that we cooked up in Basel tower and are just presenting to everybody," he told a news conference, referring to the FSB's headquarters in Switzerland.
Most of the banks would need to sell more bonds to comply with the new rules, the FSB said. Some bonds, known as "senior debt" that banks have already sold to investors, would need restructuring.
Senior debt was largely protected during the financial crisis, which meant investors did not lose their money. But Mr Carney said it in future these bonds might have to bear losses if allowed under national rules and if investors were warned in advance. (Reuters)