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Too-big-to-fail rules make banking less global

Bank regulators at last have a template for handling cross-border financial implosions. The Financial Stability Board (FSB) on November 9 spelled out final rules that force lenders to hold buffers of capital allowing them to cope with another crisis. Yet getting authorities around the world to end the too-big-to-fail problem comes at a cost to global banks' business models.

Banks deemed of global systemic importance will by 2019 have to hold the equivalent of 16 per cent of their risk-weighted assets in equity or debt that can be written off. This total loss-absorbing capacity (TLAC) should ensure that shareholders and creditors, not taxpayers, absorb future losses.

On the face of it, 23 American and European global systemically important banks (G-SIB) are better off than they were a year ago, when the FSB published its initial consultation. Though the TLAC requirement remains unchanged, it now applies to China's four big state-owned banks as well. Chinese and other emerging market lenders have six years longer to comply, but their inclusion shrinks any future competitive advantage.

Even so, TLAC is a headache, particularly for banks that fund themselves primarily with deposits. They will have to issue debt that can be written down if necessary. To hit an additional 18 per cent TLAC target by 2022, banks would in the toughest scenario have to raise over Euro 1.1 trillion, the FSB reckons.

The rules also give local regulators quite a lot of power over big foreign lenders. Institutions with overseas branches - like many international banks in Hong Kong - will have to keep between 75 and 90 per cent of their local TLAC requirement in that jurisdiction. The wording of the FSB term sheet implies host regulators can add additional capital or funding requirements as they see fit.

For a global bank that runs most of its business off a single balance sheet - like, say, Deutsche Bank - this is potentially expensive. Ever since the FSB suggested this 'pre-positioning' requirement last November, banks have moaned that making capital less fungible will hurt efficiency. The FSB's final decision forces banks to reconsider their geographical footprint. The price to pay for global bank rules may be fewer global banks.