The G20 has asked the Financial Stability Board to test the potential impact of measures to end bank bail-outs before providing its seal of approval.

In a letter to G20 ministers, Financial Stability Board (FSB) chair Mark Carney hailed the meetings in Brisbane as a potential “watershed” moment when the world’s leading economies had the chance to agree a framework that would make it possible to resolve complex cross-border banks without recourse to a taxpayer bail-out. They didn’t – or at least, not quite yet.

Instead, the G20 “welcomed” the report of the FSB on total loss-absorbing capital (TLAC) – the proposed firepower that would enable the essential functions of a distressed bank to be recapitalised and revived. Up to two-thirds of this can be core Tier 1 equity, but at least one-third must take the form of subordinated or senior unsecured debt. The G20 asked the FSB to conduct a “rigorous quantitative impact assessment and further refinement” before ministers would sign off on TLAC, ideally at their 2015 summit. In particular, the FSB is charged with “consideration of the consequences of this requirement on banks in emerging markets and state-owned banks”. The FSB agreed to exclude emerging market banks from the first round of TLAC adherence, scheduled for 2019.

There is little mystery about what this means. Only three emerging market banks are classified by the FSB as globally systemic (G-SIBs). They are all Chinese, and all state-owned. Bailing-in shareholders when the main shareholder is the government is no different from a bail-out. Since Chinese banks are mainly deposit funded, they are understandably reluctant to issue large amounts of eligible debt for a TLAC buffer that has little meaning for them.

And there is another region that will want its voice heard during the impact studies. TLAC is most easily issued out of a holding company that does not carry any of the operating liabilities (such as deposits) that are excluded from bail-in. Banks in the US, UK and Switzerland generally use the holding company model, but continental Europe is dominated by groups of operating companies. The switch to a holding company structure could be costly, complicated and unwelcome among investors.

And then, of course, there are the investors themselves. Charles Goodhart, one of the godfathers of financial stability during his time on the Bank of England’s monetary policy committee in the 1990s, challenged the political consensus in November this year by suggesting that bail-in might be worse than bail-out. A bail-out spreads the burden of bank failure across the entire tax base. A bail-in concentrates it onto institutional investors that own the majority of eligible bank capital – primarily pension funds and life insurance policies. That could be a politically unacceptable outcome as well.

If the G-SIBs are too big to bail in, then perhaps emerging market regulators have the right idea. Ask banks to hold more equity against unexpected losses, rather than a debt buffer that no one really wants to convert into equity.

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