Regulators request recovery plans from TBTF banks that shows why regulators fail

Regulators have asked the Too Big to Fail banks to document how they would respond to a series of events that would trigger the need to raise capital without relying on a taxpayer funded bailout.

This request for useless documentation is the classic example of why tens of thousands of pages of complex regulations and regulatory oversight fail to protect the stability of the financial system as well as transparency and market discipline.

The world's top banks must spell out what would trigger capital raising and other steps to survive a crisis without needing taxpayer money, a global regulatory body said on Tuesday. 

The Financial Stability Board (FSB) published final guidance for lenders and supervisors listing "triggers" that would force a bank to consider action to shore up its capital, such as writing down its bonds.... 

Compared with a draft version put out to consultation, the FSB has given banks a bit more leeway, saying that hitting a trigger should not automatically require rescue action. 

The British Bankers' Association (BBA) had told the FSB that the word "trigger" implied the need for an automatic response. 

Instead, banks will have to say in advance what happens once a trigger is hit, such as how the issue will be escalated to a top executive or the bank's board....

Without requiring the banks to take immediate action and recapitalize themselves once a trigger is hit, how exactly does this documentation reduce the chances of a taxpayer funded bailout?

By backing off the need for an automatic response, the global financial regulators demonstrate just how captured they are by the TBTF banks.

"The aim of triggers in recovery planning is to enable firms to maintain or restore financial strength and viability before regulatory authorities see the need to intervene or enforce recovery measures," the FSB's new guidance said. 

Our current financial crisis established that global regulatory authorities won't "see" the need to intervene or enforce recovery measures before bailing out the TBTF banks is the only option.

A recent example of the global regulatory authorities' inability to "see" a problem within a bank was JP Morgan's London Whale trade.  None of the global regulators supervising JP Morgan identified the trade as a problem before it was written up by the press.

Knowing they will never "see" the problem before the global regulatory authorities consider a taxpayer funded bailout necessary, the global regulators have asked the banks to identify for the authorities triggers where the banks can take action that might make the bailout unnecessary.

Given how nicely the bankers have been treated in the current financial crisis (no interruption in bonus payments), what exactly is their incentive to find triggers and take actions after they are breached that would make a taxpayer funded bailout unnecessary?

"Firms should be required to provide supervisors and resolution authorities with an explanation of how the trigger calibrations were determined and an analysis that demonstrates that the triggers would be breached early enough to be effective." 

Triggers can include a credit rating downgrade, a fall in capital ratios, a run on deposits or being asked to post more collateral to back trades.

To summarize the intent of this complex regulation: its a good idea that a top executive or the bank's board should be notified if the bank has a credit rating downgrade, a fall in capital ratios, is asked to post more collateral to back its trades or has a run on its deposits.