The Bank of England has given banks until 2020 to build up crisis funds in order to protect taxpayers from further bank bailouts, as reported in the December 12th edition of the IFR. The new rules which apply to over 400 banks and building societies will result in additional capital of some £220billion of loss absorbing capital in the UK banking system. Such loss absorbing capital can accomplish two aims. First, more capital means equates to lower losses for society as the ultimate systemic backstop for bank failure. But also, as identified in academic literature such as Jagtiani et al. (2002), Nguyen (2013) and others, non-equity capital providers (including subordinated debt investors) can play a role in enhancing market discipline, related to the hypothesis that investors, stockholders can take actions to penalise bank's excessive risk taking. While not all academics agree on this point, there is growing evidence that non-equity investors (who don't share in unlimited upside for risk taking) can play an important signalling role to markets and supervisors alike if banks pursue excessive risk taking by requiring better financing terms or yields on their capital. So it will be interesting to observe the relative financing rates and structures on this capital as it is issued over the next several years.
In the case of the UK, the net shortfall of £26 billion falls mainly on large lenders such as HSBC, Lloyds, RBS and Barclays who will need to issue a considerable notional amount of new capital securities with the new rules. The rules are now published in consultative form based on EU law relating to minimum requirement for own funds and eligible liabilities, or MREL. These rules are viewed as the final piece of capital linked banking regulation to put into place following the financial crisis, according to the IFR.
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