The Basel Committee on Banking Supervision added new requirements to the new capital adequacy regime to ensure that bank capital suffers losses before taxpayers do when a bank is failing.

The committee Thursday issued minimum requirements to ensure that all classes of capital fully absorb losses when a bank is failing before taxpayers are exposed to loss.

During the financial crisis a number of distressed banks were rescued by the public sector injecting funds in the form of common equity and other forms of Tier 1 capital, the committee notes.

“While this had the effect of supporting depositors it also meant that Tier 2 capital instruments (mainly subordinated debt), and in some cases Tier 1 instruments, did not absorb losses incurred by certain large internationally-active banks that would have failed had the public sector not provided support,” it says.

These requirements, which are in addition to reforms to the capital rules finalized last month, were endorsed by the committee’s oversight body, the Group of Governors and Heads of Supervision.

IE