PARIS (MNI) – Reducing the risks from too-big-to-fail banks will be
the focus of propositions the Financial Stability Board will make to the
G20 at its November summit, FSB chairman Mario Draghi said Monday.

After agreeing on higher capital standards for banks in general,
the goal is to increase big banks’ capacity to absorb losses without
disrupting financial markets or requiring public bailouts, the governor
of the Bank of Italy explained after a meeting of the FSB here.

“While considerable progress has been made in strengthening the
resilience of the financial system worldwide, financial systems in
advanced economies remain vulnerable to risks of fiscal strains in
national and local governments, of renewed fragilities in bank-funding
markets and of weakening economic conditions,” Draghi said.

The Basel III accord for an increase in the tier 1 capital ratio to
4.5% by 2015 and the gradual implementation of a capital conservation
buffer equivalent to an additional 2.5% by 2019 is not sufficient to
counter such global risks, he said.

Among the options to augment the capital standards for
“systemically important financial institutions” the FSB is exploring
capital surcharges, contingency capital and bail-in debt, Draghi said,
adding that the latter two would require holders of a bank’s debt to
foot any losses before the taxpayer has to come to the rescue.

How these various solutions will be applied will be left to
national supervisory authorities, while at the same time assuring that
the new standards are globally consistent, he said. Draghi stressed that
authorities are very aware of the risks of loopholes that would allow
for “regulatory arbitrage” and undermine their efforts.

In passing, Draghi said he was “confident” that the U.S., which has
yet to adopt even the lower capital requirements of Basel II, would come
on board with the efforts to strengthen banks’ capital. It is not simply
an issue of a level playing field, he argued.

“Everybody understands that financial markets are global,” he said.

The FSB also reviewed recommendations today to improve transparency
on over-the-counter derivatives markets and reduce their systemic risk,
in line with the objectives of the G20.

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