Banks Face Up to 2.5 Percentage Point Buffer in Basel Accord
Global regulators said banks deemed too big to fail must hold as much as 2.5 percentage points in additional capital as part of efforts to prevent another financial crisis. As many as 30 banks may face some level of surcharges, according to a person familiar with the discussions.
The additional capital buffers will range from 1 percentage point to 2.5 percentage points, the Basel Committee on Banking Supervision said in a statement yesterday. From 28 to 30 banks, including as many as eight in the U.S., may face surcharges, said the person, who declined to be identified because the talks are private.
Many banks are “vigorously lobbying” against being branded as systemically important, Sheila Bair, chairman of the U.S. Federal Deposit Insurance Corp. told U.S. lawmakers on June 22.
It’s the best possible outcome for U.S. banks given the way the regulators were pushing for high capital levels,” Charles Peabody, an analyst with New York-based Portales Partners LLC, said in a phone interview. The 2.5 percent maximum surcharge is the most that European banks can withstand as they’re “less well-capitalized” than U.S. banks and more exposed to risky sovereign debt, Peabody said
The Basel committee has said internationally active banks should hold core Tier 1 Capital of 7 percent of their risk- weighted assets
The agreements “will help address the negative externalities and moral hazard posed by global systemically important banks,” Jean-Claude Trichet, president of the European Central Bank and the group that oversees the Basel Committee, said in the statement following a meeting in Basel, Switzerland
The data available to regulators to measure a bank’s systemic importance are based on older figures and the final list of lenders facing surcharges may change, said two people familiar with the discussions. The list may also change as banks shrink or adapt their businesses, said one of the people.
The extra fee must be met by banks building up their core reserves, and not by issuing so-called contingent capital instruments such as CoCo bonds, the committee said.
The Basel group said banks should meet the extra requirement using common equity, a measure of their core reserves which is made up mainly of ordinary shares and retained earnings.
So-called contingent convertible bonds that convert into ordinary shares when a bank’s reserves fall below a certain level, won’t be eligible, the committee said, adding that national regulators are free to include them in any separate requirements they impose.
Banks’ systemic importance will be assessed by measuring their size, interconnectedness with other financial institutions, the difficulty for another institution to take over the role they play in the market, complexity and global activity, the Basel group said
The extra capital requirements are “probably not that big of a burden considering the funding advantage that banks have when the markets consider them too big to fail,” said Jesper Berg, senior vice president at Denmark’s biggest mortgage bank, Nykredit A/S.
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