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New global rules to prevent banks that are "too big to fail" from being bailed out by taxpayers have been proposed.

The rules, created by the Financial Stability Board (FSB), a global monitoring body, would require big banks to hold much more money against losses.

Mark Carney, FSB chairman and governor of the Bank of England, said the plans were a "watershed" moment.

He said it had been "totally unfair" for taxpayers to bail out banks after the financial crisis of 2008 and 2009.

"The banks and their shareholders and their creditors got the benefit when things went well," he told the BBC.

"But when they went wrong the British public and subsequent generations picked up the bill - and that's going to end".

Mr Carney explained that the new system would ensure that bank shareholders, and lenders to banks such as bondholders, would become first in line to bear the brunt of future losses if banks could not pay out of their own resources.

"Instead of having the public, governments, [and] the taxpayer rescue banks when things go wrong; the creditors of banks, the big institutions that hold the banks' debt - not the depositors - will become the new shareholders of banks if banks make mistakes."

"Let's face it, the system we've had up until now has been totally unfair," he added.
Bigger cushion
Governments around the world spent hundreds of billions of pounds bailing out stricken banks during the financial crisis of 2007-08.

The banking industry strongly supports this work
Anthony Browne, BBA

At its peak in the UK alone, taxpayers' direct subsidy to banks stood at more than £1 trillion according to a recent report from the National Audit Office.

In the wake of the financial crisis, world leaders asked the FSB to come up with proposals to prevent similar bailouts from happening in the future.

The proposed new rules, which are up for consultation and should take effect in 2019, require "global systemically important banks" to hold a minimum amount of cash to ensure they will be able to survive big losses without turning to governments for help.

The capital set aside should be worth 15-20% of the bank's assets, the FSB said. That is a far bigger cushion against losses than is required by current banking rules.

The FSB hopes this stronger policy will prevent taxpayers from being forced to pay billions of pounds again to stop big banks from collapsing, in the event of another financial crisis.

Anthony Browne of the British Bankers' Association welcomed the proposals.

"The banking industry strongly supports this work, which is a really important step in ending 'too big to fail' and ensuring that never again will taxpayers have to step in to bail out banks," he said.

"We agree with the aims and objectives of the proposals for total loss absorbing capacity ('TLAC'), that there should be sufficient resources available to absorb losses in the event of bank failure and provide new capital to ensure critical economic functions can continue to be provided," he added.

Less disruption

"Agreement on proposals for a common international standard on total loss-absorbing capacity for [big banks] is a watershed in ending 'too big to fail' for banks," said Mr Carney.

"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."

According to the BBC's business editor Kamal Ahmed, analysts estimate the new capital requirements could cost €200bn (£157bn) for Europe's banks alone, with the cost for globally significant banks in the US, Japan and China likely to be much higher.

The FSB has published a list of 30 banks it regards as "systemically important", meaning their collapse could have a wider impact on global financial systems.

In the UK, the banks are Barclays, Standard Chartered, HSBC and the Royal Bank of Scotland.

Lloyds Banking Group has been removed from the list as its potential impact on financial systems has declined in recent years.

The UK government spent around £65bn directly bailing out RBS and Lloyds during the crisis. The government still owns an 80% stake in RBS and 25% of Lloyds.
Analysis: Andrew Walker, economics correspondent, BBC News.
Lehman Brothers was the classic case of a financial institution that was too big to fail - or at least it probably was according to the previous Federal Reserve chairman Ben Bernanke.

Of course it DID fail, and the financial crisis entered a new and more dangerous phase after Lehman filed for bankruptcy in September 2008. The immediate lesson that many policy makers drew - and this is contested - was that it should have been rescued.

And so they decided that other big financial firms would not fail and taxpayers' money was thrown at the banks around the world.

But there is another lesson drawn from the Lehman episode: that it would be far better to change the rules of finance to ensure that any bank could safely fail if it gets into serious difficulty no matter how big it is.

That's where the Financial Stability Board's new proposals come in.

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New global rules to prevent banks that are "too big to fail" from being bailed out by taxpayers have been proposed. The rules, created by the Financial Stability Board (FSB), a global monitoring body, would require big banks to hold much more money against losses.

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Once, personal pensions were simple. You paid money in every month, and you knew how much cash you would receive once you retired.

But this "defined benefit" model now provides gold-plating only for the lucky few.

Many more people now pay into a scheme based on "defined contribution" (DC).

That means you know exactly how much you are paying in.

But you do not know for sure how much you will get out - i.e. how big your pension will be.

As a result, the government wants to allow Dutch-style "collective" defined contribution schemes, known as CDCs.

Such schemes are designed to give people more certainty over their retirement incomes. It is claimed they can also increase the value of pay-outs by around a third.

What does a collective scheme do?

The best way to think of a collective scheme is to see it as being halfway between a defined benefit scheme and a defined contribution scheme.

From an employer's perspective, there is no risk, as he or she will pay out the same amount every month. That makes it look like a defined contribution scheme.

But from an employee's point of view, there is a target for what he or she will receive on retirement.

For example, the target might be 30% of their salary, after they retire. That makes it look like a defined benefit scheme.

Why are they called "collective" schemes?

Conventional pension schemes involve hundreds, or even thousands, of employees. But in collective schemes, tens of thousands of employees get together in a single pension plan.

A collective scheme might therefore involve workers across an industry - such as shop workers, or taxi drivers - rather than a single company.

Do they provide better returns?

They can do. Their larger scale means their costs are lower. Unlike conventional DC schemes, they do not have to account for each employee's individual pension pot.

They are also able to invest in longer-term assets, such as transport projects or mortgages.

For accounting reasons, other pension schemes rely more on the bond markets, which are stable, but can provide lower returns.

But unlike a defined benefit scheme, these returns are not guaranteed. For example, in 2012, a quarter of the schemes in the Netherlands cut pensions by an average of 1.9%, to restore their finances.

Is it true they can provide a pension which is 30% larger?

David Pitt Watson, the chairman of Hermes Focus Asset Management, has said returns on CDCs can be "up to 39% " higher than DC schemes.

A study of CDCs between 1955 and 2011 by consultants Aon Hewitt compared them with defined contribution schemes.

It concluded that those retiring on the average DC scheme received 21% of their previous salaries. Those on a CDC scheme received 28% of salary, out-performing the DC schemes by 25%.

But the study also showed that CDCs did not provide superior returns in every year.

Between 1994 and 2004, the reverse was true. However, the study argued that CDC projections are much less volatile. "The pension journey is more stable and contains fewer surprises," it said.

Some pensions experts, including Tom McPhail at Hargreaves Lansdown, say they doubt that such returns are actually achievable.

So what are the disadvantages of CDCs?

*There is no guarantee that workers retiring will actually receive the target proportion of their salaries.

*Workers using defined contribution schemes will get new freedoms to use their pension pots as they like from April 2015. It is not clear whether CDC members will get the same freedom.

*DC workplace pension charges will be capped from April at 0.75% a year. It is unclear whether such a cap will be imposed on CDC schemes.

Could CDC schemes work in the UK?

Critics argue that the Netherlands has a very different social structure from the UK, so collective schemes might prove difficult to run here.

They would need serious co-operation between different employers, to sign up hundreds of thousands of employees.

And following the government's auto-enrolment initiative, all but the smallest companies are already signed up to pension schemes.

The TUC is an enthusiastic supporter of CDC schemes. But it believes employers will need substantial incentives to start them off.

Several Dutch pension funds have said they would be happy to launch schemes in the UK.

Is it true the Dutch actually want pensions more like the British?

The youth wings of three Dutch political parties have come together to push for pension reforms in Holland. But there is no widespread revolt against CDCs.

Pensioners in Holland enjoy much bigger pensions than those in the UK, but that is partly because of higher contribution rates.

Dutch workers contribute between 21% and 25% of their pre-tax pay to their pensions. In the UK, we contribute 9.4%.

Who runs a CDC scheme?

The schemes are run by a group of actuaries. Rather like "with-profit" schemes, the actuaries declare the pension pay-out rate for every year.

They can decide to cross-subsidise the generations, by cutting or increasing payouts for workers in a particular age range.

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Once, personal pensions were simple. You paid money in every month, and you knew how much cash you would receive once you retired. But this "defined benefit" model now provides gold-plating only for the lucky few. Many more people now pay into a scheme based on "defined contribution" (DC).

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envelope budgeting

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Create a mind map or revision cards