It has been a little over seven years since one of the most severe financial crisis occurred in global history. The 2008 global financial crisis were brought upon by the trading of bad securities and mortgages on the open market. Once the phenomenon was discovered, the market crashed. This ensued a huge bailout plan that was implemented by the governments across the world in order to uphold some of the world’s largest financial institutions.
‘Too big to fail’
In recent times, however, there may be a mandated amount of capital that banks may be deemed to raise as part of a contingency plan. In the event that there is a similar consequence faced as that of 2008, the banks will be able to save financial assets themselves to some extent. The previous bailout plan had a major dent in the federal economy that has taken nearly a decade to recover. The repercussions of the bailouts are still being felt nearly 10 years later. Previously, taxpayer money was the only source of a potential bailout that was possible. Billions of dollars were invested in financial institutions such as AIG to keep it from declaring bankruptcy, which would worsen the global economy.
According to the total loss absorbing capacity or TLAC, the larger banks will be expected to bail in 16 percent of risk weighed assets in 2019 and 18 percent in 2022. Also, the rule would strengthen the ability of the largest domestic and foreign banks operating in the United States to reslove financial prices without large government support or taxpayer assistance. The translation of the amount from percentage to dollars is estimated at 1.2 trillion dollars by the year 2022. This would be the stipulated amount that banks would be raising for a continency plan.
Even though the 1.2 trillion dollar amount that may be raised will not be enough to sustain a full blown financial catastrophe, it will enable the banks to come up with solutions. The policy will essentially buy the country more time in order to systematically plan emergency measures and act more responsibly. Experts suggest that with current estimates, it would buy governments up to 48 hours after the bank fails.
The current measures are planned to be installed to engender a greater amount of accountability amongst the banking organizations which had gambled large amounts of money on the global free market.
The larger cartel of banks have put away the idea stating that the current banking sector is under its revival and if it is levied with a mandate of such sorts, it could be counterproductive. They stated that it would take them years to recover after setting aside a mandatory minimum amount. They also added that this will result in an unprofitable practice, which could hasten the banks demise instead of strengthening the economy. The Federal Reserve, however, has moved to apply the TLAC to eight of the largest banks in America, with an estimated TLAC amount of 120 billion dollars.