Banks Anxious as Regulators Debate SIFI Surcharge

WASHINGTON — A weekend meeting of international regulators is shaping up to be a real nail-biter.

The Group of Governors and Heads of Supervision, the oversight body for the Basel Committee on Bank Supervision, is set to meet Saturday to hash out a capital surcharge for the biggest banks.

Unlike most meetings, however, the key issues have yet to be worked out, including how high the charge will be, which institutions it will apply to, and what kind of capital could count towards it.

"The question depends on whether or not they actually agree," said Karen Shaw Petrou, a managing partner at Federal Financial Analytics Inc. "The moment going into the meeting there was wide disagreement among the members — a lot wider than usual, They don't have a set of largely agreed upon items to finalize."

The biggest U.S. banks, like JPMorgan Chase & Co., and Bank of America Corp., know they will be targeted by the cap, but are waiting to see how painful it will be. Investors have been widely anticipating a range between 1% and 3% for the systemically important financial institution surcharge.

"The large bank perspective right now, to a large extent is, 'The train has left the station,'" said a policy official who works closely with large commercial banks. "I don't think any of them have any great expectation that the Financial Stability Board is going to come out with something less than 2.5%."

But international regulators disagree sharply on the issue. The United Kingdom and the Swiss governments have advocated for much heftier surcharges around 15% and 19%, respectively.

Japan, France and others, however, are not nearly as bullish, and may want to reduce the level of the surcharge from 3%.

"There's a wide divergence based on the banks," said Chip MacDonald, a partner at Jones Day. "The UK wants more, the Swiss want tons more. The Germans want less, I think the French want less. The European banks hold a lot of sovereign debt ... and they're struggling. People are looking at capital requirements in light of that and saying 'We don't want to put more stress on those banks when they are still cleaning up their asset portfolios.'"

Differing views even extend among U.S. regulators — as Acting Comptroller of the Currency John Walsh has advocated for a "modest" surcharge on the lower end of a range of 1% and 3%. Sheila Bair, outgoing chairman of the Federal Deposit Insurance Corp. has advocated that a 3% on such firms would be a "moderate" approach.

Regulators have been contemplating such a charge since last September, when the Basel Committee agreed on a framework to raise capital standards to 7% by 2019. While they made it clear that they would also institute a surcharge on the largest institutions, the details were mostly left up in the air.

Many U.S. banks had been hoping the issue would fade as other regulatory requirements prompted by the Dodd-Frank Act kicked in.

"What the banking industry has been trying to say is, 'Listen, we are doing the living wills. We're subject to the capital planning. We're subject to the 'Volcker Rule.' You have all these limits you are putting upon us and all these enhancements of prudential requirements, do we really need the surcharge?'" said Greg Lyons, a partner at Debevoise & Plimpton LLP.

Aside from the biggest U.S. banks, however, it's uncertain what other institutions will be on the list. Most observers have said the surcharge will apply to roughly 30 global institutions. But regulators are expected to release broad standards that will divide systemically important banks into different categories, which may affect what surcharge they pay.

"Everybody wants to know who's in what bucket, which banks of what country's bucket," said Ed Hida, a partner with Deloitte & Touche LLP. "I would expect some broad standards for those, and at the same time a real jockeying around who's in what bucket, as well."

One of the key questions left up to regulators is how a global SIFI will be defined, and whether large domestic institutions, which may have some global operations but not nearly as large in scale, will be included.

"There seems to be a lot of lobbying going on around now for who should be in those different buckets," said Hida. "They're still be more jockeying on that to come."

Already, banks are seeking to position themselves to skirt the additional requirement, which U.S. banks claim would hinder lending and be overly burdensome combined with requirements from Dodd-Frank.

"They don't believe or want to have a SIFI surcharge come out of this meeting," said the policy official. "They expect that one will, but no matter what, this is Chapter One of this process."

There is also the issue of what kind of capital regulators will be acceptable to constitute the surcharge. The U.S. has advocated strongly that it should be Tier 1 common, and exclude hybrid instruments, like contingent capital and bail-in debt, which the European counterparts would like.

Also unclear is when the surcharge will go into effect. On that issue, at least, banks may see some relief. Most observers expect a generous phase-in period as well as a graduated approach based on how much of a threat an institution poses to the global economy.

Whatever the final decision, this will not be the final word on the issue. U.S. lawmakers have already raised concerns that the surcharge may curb lending. If the surcharge is deemed excessive, banks may encourage them to push back on the issue.

On Friday, three lawmakers sent a letter to Treasury Secretary Tim Geithner, Fed Chairman Ben Bernanke and Fed Gov. Daniel Tarullo urging caution on requiring higher levels of capital by the largest U.S. institutions. They argue the additional surcharge would require banks to hold more than $600 billion in capital on their balance sheets.

"There are serious concerns that unnecessarily high capital surcharges … could present an untimely drag on the U.S. economy and recovery," wrote Reps. James Renacci, R-Ohio, Nan Hayworth, R-NY and John Carney, D-Del. "The Basel Committee has not demonstrated that revised capital levels are necessary in the wake of all of the reforms implemented since the crisis. Nor have regulators quantified the impact of those reforms."