Buttonwood: Born to run

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The never-ending story

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Bonds that will take the hit when banks fail

FIXING the banking system to prevent another crisis on the scale of 2007-08 is a fiddly and time-consuming task. It is not the kind of thing that generates tabloid headlines and public approbation. But another important stage in the process was reached on November 9th when the Financial Stability Board (FSB), a global regulators’ forum, issued new guidelines on bank balance-sheets.
The underlying problem is as ancient as banking itself: banks lend out more money than they have capital to absorb losses. If their loans go sour (or if the banks’ own creditors, including depositors, lose confidence), institutions can rapidly go bust. And then, because of the importance of the banking system to the economy, governments feel obliged to ride to the rescue at potentially vast cost.

To avoid this danger, the FSB wants private …

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