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article imageGlobal financial regulator issues rules to curb 'too big to fail'

By Nate Smith     Nov 11, 2014 in Business
A global banking regulator has issued a series of proposals meant to protect taxpayers from ever again having to finance a bailout of large banks considered "too big to fail."
According to new rules submitted by the Financial Stability Board, share- and bondholders would be primarily responsible for any bank-incurred losses should the institution itself take on more financial loss than it can afford to repay.
The new regulations would also require banks to double the amount of capital on hand to offset any monetary losses.
The proposed rules are the result of a meeting of G20 world leaders during a 2013 summit in St. Petersburg, Russia. The Financial Stability Board created the recommendations in conjunction with the Basel Committee on Banking Supervision.
Requiring banks to keep enough money allocated to risk of financial loss refers to “total loss-absorbing capacity.”
Capital allocated for financial loss should amount to between 15 and 20 percent of a given lending institution's overall assets, according to the new proposals, which do not take effect until 2019.
The new lending guidelines will be formally presented before another meeting of the G20 leaders Nov. 15 and 16 in Brisbane, Australia.
In a statement, Chairman of the Financial Stability Board Mark Carney said:
Agreement on proposals for a common international standard on total loss-absorbing capacity for G-SIBs is a watershed in ending “too big to fail” for banks. Once implemented, these agreements will play important roles in enabling globally systemic banks to be resolved without recourse to public subsidy and without disruption to the wider financial system.
Mr. Carney also functions as the Governor for the Bank of England.
In all, 30 worldwide lending institutions have been deemed, "global systemically important banks."
That is, they're so intertwined within the world economy that substantial financial loss impacts economies all over the world.
In 2007 and 2008, public money bailed out banks in Europe and the United States.
According to a report from the United Kingdom's National Audit Office, UK taxpayers shelled out over a trillion euros to rescue banks at the height of the financial crisis. The UK government still owns upwards of an 80 percent stake in the Royal Bank of Scotland.
American taxpayers footed some $700 billion to the largest banks in order to avoid default.
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