Policymakers are, therefore, now engaging with the crucial distinction between those parts of a bank’s capital structure that absorb losses in a going concern – namely, equity – and those that can smoothly absorb losses in resolution or liquidation. The recent G20 Leaders Summit called on the Financial Stability Board to produce plans over the coming year for the level and location of goneconcern loss-absorbing capacity (or GCLAC) in global banks and dealers. In a nutshell, this  1  See Financial Stability Board (2013), ‘Narrative progress report on financial reform’; Tucker (2012), ‘Banking in a market economy - the international agenda’, published in AFME (2012), Investing in Change: A book of essays on financial reform in Europe; and Tucker (2013), ‘Competition, the pressure for returns and stability’, published in Dombret and Luciuis, Stability of the Financial System; Illusion or Feasible Concept. BIS central bankers’ speeches  1  will be a policy for the amount of term bonded debt issued by banks, and where in the group structure it is issued from. I believe that in time the Basel Capital Accord could usefully be recast so that it has distinct components for going-concern and gone-concern requirements.
So summing up, as with the Concordat, a country’s prudential regime could be judged as complying with the Core Principles even though it does not ensure that the distribution of capital across a banking group leaves its individual entities adequately capitalised. Finally, the Capital Accord7 – now in its third incarnation – applies to banking groups on a consolidated basis (or at a sub-consolidated basis for different tiers of a group). The Accord gives jurisdictions an option to apply capital requirements on a solo-basis to individual legal entities as an alternative to applying the requirements to consolidated groups of legal entities8, but there is no requirement to exercise that option. Again, then, there is no hard rule that ensures a sensible distribution of capital across individual entities within a group. If you cannot fit all that together, you can be excused! Here’s an attempt to make sense of it. There appears to be a disconnect between the Concordat (consolidated supervision); the Core Principles (both consolidated and solo perspective recognised as important, but no mandated solo capital requirements); and the Capital Accord (consolidated and sub-consolidated, with solo subject to deductions allowed but not required). Or, put another way, each of the three BCBS documents does an important job but none of them addresses the distribution of capital across a group. That is a gap. Do not assume that this is a theoretical point. It is one reason there have been attempts by regulators to shore up the financial soundness of local subsidiaries during the crisis.