Brisbane’s G20 meeting of world leaders is shaping up to be remembered as the time when the belief that the world’s largest banks were Too Big To Fail finally ended. Bank of England Governor Mark Carney foreshadowed the impending change at the weekend. Mr Carney said the bosses of the big banks behind the 2008 crash should have paid more for their errors, such as handing back severance packages and spending time in jail. The failure to inflict real punishment in both Britain and America had left the global economy exposed to the same risks as it was six years ago, he said.
London’s Daily Telegraph reported:
“They got away with their compensation packages, they got away without sanction,” Mr Carney told the International Monetary Fund’s annual meeting in Washington.
“Maybe they were not at the best tables in society after that, but they’re still at the best golf courses. That has to change.”
The Bank has proposed that senior bankers face prison if their organisation fails in the same way that Lloyds and RBS did in the financial crisis.
Curtailing pay alone was not enough to prevent risky behaviour, he said. Top executives should be forced to take full responsibility for the recklessness of their staff.
In his formal address to the 29th Annual G30 International Banking Seminar, Mr Carney said the job of fixing the fault lines cannot be complete without ending Too Big to Fail. He continued:
Operating in a heads-I-win-tails-you lose bubble, the world’s largest banks threatened the stability of the global financial system. Their bail-out using public funds undermines market discipline and goes to the heart of fairness in our societies.
This cannot be allowed to continue. It is essential that all systemically important financial institutions can be resolved when they fail: – Without the need for taxpayer support. – And without disruption to the wider financial system or real economy. Tackling the rampant moral hazard at the heart of the financial system hasn’t been easy. And our success can never be absolute. Specifically, we can’t expect to insulate fully all institutions from all external shocks, however large. But we can change the system so that systemically important institutions bear the cost of their own actions and the risks they take. After much hard work, and extensive cross-border co-operation, the FSB is on track to agree proposals that, once implemented, will be decisive in achieving that. The use of statutory resolution powers to resolve global systemic banks will finally be possible. The proposals will be presented to the Brisbane G20 Leaders summit in November. That Summit will be the watershed in ending Too Big to Fail. The first is an internationally agreed standard on the total loss absorbing capacity (or TLAC) that globally systemic banks must hold. It will be based on clear principles. But it will be much more than a list of aspirations. It will include a detailed indicative term sheet that will cover the amount; the type, and the location of that loss absorbing capacity. It will establish a level playing field between global systemic banks, while taking into account differences in national resolution regimes.
It will ensure globally systemic banks finally have the quantum of total loss absorbing capacity that extensive analysis show balances the benefit of greater resilience against the higher funding costs for the banks that results from the removal of public subsidies. It will set clear roles for home and host regulators in a resolution. It will give host nations the confidence that they won’t again be side-swiped by the failure of a large foreign bank. And, by removing the implicit subsidy that systemic banks have long enjoyed, it will re-establish market discipline. Once implemented, it will make our financial systems more resilient and our economies stronger.