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.
It is therefore time for us to reflect on these situations and try to be a step ahead. That is what saves financial markets – being a step ahead! I remember in February 2007, our Central Bank introduced an additional 1% provision for all performing loans of banks, because we realized that there was bubble that was forming. But, the public and media reaction to that policy action was somewhat rough. The next day’s newspaper headlines said that Cabraal has delivered a kidney punch to the banks; some claimed that we were killing the industry; others lamented that we are making it difficult for the banks unnecessarily. Today, one year and 2 months later, people realize that our anticipation has saved the day. We don't want everyone to get up and shout and acknowledge it. But perhaps those of you who are directors of finance companies, as persons who are responsible for about 5% of the financial system of this country, would now realize that, there are certain steps that need to be taken early in order to safeguard the entire industry. Sometimes, some people tell us, “our shareholders have been the ones who have made us. Our depositors have been continuously supported us. Therefore, we are responsible to our shareholders and depositors, and nobody else”. Perhaps, there is some truth in that statement. But, think about this a little more deeply. What would happen if one finance company fails?