Last updated by The POOG on August 24, 2020.

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Introduction

The Financial Stability Board (FSB) was created by the G-20 countries in April 2009 from the Financial Stability Forum (FSF). This latter organization was was founded in 1999 by the G7 Finance Ministers and Central Bank Governors[1].

The purpose of the FSB is stated as[2]:

The FSB promotes global financial stability by coordinating the development of regulatory, supervisory and other financial sector policies and conducts outreach to non-member countries. It achieves cooperation and consistency through a three-stage process.

We have added emphasis to important points in quoted sources.

Global Systemically Important Banks

The global financial crisis of 2007-2008[8][9] was addressed by the G-20 ministers in 2009.

G-20 Leaders called on the FSB to propose measures to address the systemic and moral hazard risks associated with systemically important financial institutions (SIFIs). The “too-big-to-fail” (TBTF) problem arises when the threatened failure of a SIFI leaves public authorities with no option but to bail it out using public funds to avoid financial [system] instability and economic damage.

FSB[6]

The majority of SIFIs are a set of global systemically important banks (G-SIBs) whose systemic risk profile is deemed to be of such importance that the bank’s failure would trigger a wider financial crisis and threaten the global economy.

The criteria for determining whether a bank is a G-SIB was established as follows:

The Basel Committee’s assessment methodology for global systemically important banks requires a sample of banks to report a set of indicators to national supervisory authorities. These indicators are then aggregated and used to calculate the scores of banks in the sample. Banks above a cut-off score are identified as G-SIBs and are allocated to buckets that will be used to determine their higher loss absorbency requirement

BIS[10]

Work of the Basel Committee mentioned in this quote is discussed in our article: Bank for International Settlements.

The FSB releases a list[3][7] every November of the G-SIBs. Currently there are 30 banks on the list.

Resolution Planning and Achieving Resolvability

The primary focus of FSB activity is to ensure that resolution plans exist for all of the G-SIBs. The FSB provides research and policy recommendations for the countries with G-SIBs.

In other words, if a TBTF bank fails, governments need to have a plan in place of how they will resolve the issue without creating a financial system collapse.

A 2013 FSB report[6] addresses the issue and includes the consideration that ‘bail-ins’ can be used.

Principles on Bail-in Execution

Originally considered in a 2011 report by the FSB and updated in 2014[5], the idea of using ‘bail-in’ as a resolution tool to rescue a failed bank became entrenched in international financial thinking.

Bail-in within resolution is at the core of resolution strategies for G-SIBs. It helps achieve a creditor-financed recapitalisation by way of a write-down and conversion of liabilities into equity that minimises impacts on financial stability, ensures the continuity of critical functions, and avoids exposing taxpayers to loss.

FSB[4]

The FSB lists 6 principles for establishing bail-in policy:

  1. xxx

The Hierarchy of Credit

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The Arguments Against Bail-in

There are a number of arguments that demonstrate a universal requirement for bank accounts and other investment services by the general public. As such, basic bankining services should be protected as a public right.

The Financial Transaction Requirement for a Bank Account

Either you have your transaction money inside or outside the banking system. If it is inside, then you have one or more bank accounts suchaas savings or chequing accounts. Banks regularly invent new flavours of these basic types.

The accounts are the portals through which all your electronic payments and deposits flow. Debit card transactions go directly against your account. Credit card transaction are paid through inline banking, direct withdrawls or personal cheque (on an account).

The part of the economy outside the banking system is essentially cash, an economy that the government would dearly love to curtail.

The Government Requirement for a Bank Account

In Canada as with most Western economies, the government pays by either direct deposit (preferred by them) or by cheque.For the latter, you either deposit the cheque in your account or try and find someone who will cash it such as one of the usurious storefront cheque-cashing services.

To pay the government you have a few options options, most requiring a bank account at some stage of the transaction. Revenue Canada has a list of payment methods[12]. Few allow for cash transactions.

Public Ignorance About the Nature of Their Bank Investments

The general public and even bank employees do not understand that their deposits and investments with a bank are considered to be unsecured and essentially uninsured loans to the bank.

When you deposit money into a savings account, the money is no longer yours. Instead, you have a credit from the bank for that amount. What has happened is that with that money you have made a low interest unsecured loan to the bank that is callable on demand.

Although

Further their status in the hierarchy of creditors is near the bottom.

  1. It is argued that tax payers should not have to bail out banks. Yet most customers subject to a bail-in are taxpayers.
  2. It is virtually impossible to transact business nowadays without a bank account. All credit card and debit card transaction – almost the entire economy – require the use of a bank account at some point.

The Moral Hazard Argument

The Only Saving Vehicle for many

Total Loss-Absorbing Capacity (TLAC)

This term is defined as:

Total loss-absorbing capacity is an international standard, finalised by the Financial Stability Board (FSB) in November 2015, intended to ensure that global systemically important banks (G-Sibs) have enough equity and bail-in debt to pass losses to investors and minimise the risk of a government bailout.

From January 1, 2019, G-Sibs are required to hold a TLAC amount of 16% in terms of risk-weighted assets (RWAs), or 6% of the leverage exposure measure. This increases to 18% of RWAs, or 6.75% of leverage exposure by January 1, 2022.

Risk.net[11]

The important point to note is the assumption that ‘investors’ are expected to make up the capital shortfall that the failing bank is experiencing. This is the ‘bail-in’ rather than a government ‘bail-out’ which is not an option included above.

In fact we will see elsewhere that the term ‘investors’ is misleading. The actual term to be used is ‘unsecured creditors’ which includes all bank deposit account owners.

Summary of FSB Activity with a Focus on Bail-in

The FSB is primarily a research institution providing policy guidelines and principles to help countries to create legislation that promotes financial system stability. A major area of concern is that of the process for reolving the failure of a G-SIB in a manner that the financial system is not threatened. To this end, an important tool is the bail-in process.

There is concern for the global and national financial systems but absolutely no concern for the individual bank account holder or investor.

You, dear reader, should now research your own country’s implementation of bail-in. Another article on this site will explore Canada’s legislation and proposed strategy. Since all countries are working from the same FSB guidelines, their legislation should be similar to Canada’s.

The Solution to the Bail-in Issue

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References

  1. History of the FSB. FSB.
  2. Work of the FSB. FSB.
  3. 2019 list of global systemically important banks (G-SIBs). FSB, 22 November 2019.
  4. Principles on Bail-in Execution. FSB, 21 June 2018. PDF.
  5. Key Attributes of Effective Resolution Regimes for Financial Institutions. FSB, 15 October 2014. PDF.
  6. Progress and Next Steps Towards Ending “Too-Big-To-Fail” (TBTF). FSB, 2 September 2013. PDF.
  7. Global Systemically Important Financial Institutions (G-SIFIs). FSB, 22 November 2019.
  8. 2007 Financial Crisis Explanation, Causes, and Timeline. Kimberly Amadeo, Updated May 04, 2020.
  9. The Stock Market Crash of 2008. Kimberly Amadeo, Updated April 20, 2020.
  10. Global systemically important banks: Assessment methodology and the additional loss absorbency requirement. BIS, Updated 3 April 2020.
  11. Total loss-absorbing capacity (TLAC). Risk.net.
  12. Payment options for individuals and businesses.