Reforms to bank regulation are not over, top regulator Mario Draghi said yesterday after tougher rules were unveiled, noting that issues with large global banks remained unresolved.
“It’s not done! We have now a second part which is very, very important – to address the problem of the systemically important institutions,” said Mr Draghi, speaking as the chairman of the Financial Stability Board.
Central bankers on Sunday agreed new rules that would require banks to raise the minimum capital reserves that they hold against losses.
But big banks of a size that can affect whole economic systems can expect to see further curbs.
Regulators said Sunday that such important banks “should have loss absorbing capacity beyond the standards announced... and work continues on this issue.”
Mr Draghi explained that the new capital rules unveiled Sunday will help cut the probability of big bank failures but “it does not address the moral hazard problem that stems from the fact that these institutions are just too big or too interconnected to fail.”
During the financial crisis, governments were forced to step in and bail out major banks since allowing them to fail could have brought down whole economies.
Mr Draghi said that regulators want to ensure that in the event such major banks got into trouble in the future, there must be a way to wind them up “without creating huge market disruptions that we have seen and without dipping into taxpayers’ money.”
Given their size, these banks would be required to have a bigger cushion of capital that they must hold against losses, the regulator added.
“We do so in a variety of ways which range from having capital surcharges for these institutions, to contingent capital ... We are only now identifying tools,” said Mr Draghi, who is Italy’s central bank chief.
Such big banks would also need “an enhanced supervision, which is broader, more effective, more intrusive because the stakes are way higher than in a small- to medium-sized bank,” he added.