Banks headquartered in the UK will need to find an extra £4 billion to help protect British taxpayers from being forced to fund another round of bailouts, the Bank of England has said.
Estimates released by the Bank show an industry-wide shortfall in the amount that banks, building societies and investment firms need to hold in order to meet new guidelines known as the minimum requirement for eligible liabilities and own funds (MREL), set to come into force in 2022.
Firms will be required to restructure a total of £116 billion worth of existing debt, but are currently facing a net shortfall of £4 billion in order to meet the new regulations, the consultation document explained.
MREL forces banks to hold enough money to absorb losses, which could be drawn down in the face of collapse to finance an orderly wind-down.
UK banks have already been building up significant balance sheet buffers since the 2008 financial crisis to meet new rules.
MREL requirements aim to help avoid another round of bank bailouts, as seen during the last financial crisis when the UK Government was forced to step in and save Royal Bank of Scotland and Lloyds Banking Group, spending £46 million and £20.5 billion respectively of taxpayer cash.
The Government also made moves to nationalise both Northern Rock and Bradford & Bingley during the crash.
While the Bank warned that the MREL safeguards could ultimately increase the cost of lending for consumers, and may have a "negative effect on investment and the level of GDP (gross domestic product)", it suggested those costs were worth the benefits.
"Ensuring that institutions have sufficient loss-absorbing capacity in resolution is necessary to make resolution credible without public capital support and therefore to end the 'too big to fail' problem," the paper explained.
"It can also ensure the continuity of critical functions and reduce uncertainty associated with institution failures."
While administrative costs of implementing MREL will vary for each firm, it explained that they are likely to be one-off costs that would be relatively straight forward for banks to absorb.
The Bank said MREL also creates an incentive for banks to avoid "excessive risks", since the cost of a collapse will be shouldered by creditors rather than public funds.
The Bank of England is now calling for feedback on its consultation paper until January 2 2018.