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Federal Reserve Board Chairman Ben Bernanke sought to assuage fears by the biggest banks in the United States that they may have to follow European counterparts in raising capital standards to 9% by mid-2012.
November 2 -
Last week, the Basel Committee on Banking Supervision announced plans to oversee how each country implements the new capital standards. But such a step may signal problems before the final rules are even adopted.
September 30 -
International regulators have agreed to keep a proposed capital surcharge on the world's most systemically important firms despite concern among institutions that the extra fee will be excessive and crimp lending.
September 28 -
American banks aren't the only ones protesting a capital surcharge on systemically important institutions.
September 8
WASHINGTON — International regulators ended months of speculation on Friday by
But the Financial Stability Board also left out some key details, including the exact size of the surcharge, which will vary across institutions. Instead, regulators said they would postpone that decision until next November, a potential negative for firms that were looking for clarity on exactly how much capital they will have to hold.
"This is our big worry as it prolongs the capital uncertainty, which means the big banks will have to assume the worst when devising capital distribution plans for the Federal Reserve," Jaret Seiberg, a financial services analyst at MF Global's Washington Research Group, wrote in a research note. "That could limit the amount of capital distributions even though we believe these distributions will be higher than in 2011."
Regulators have previously said that firms would have to hold between 1% to 2.5% in extra capital depending on a bank's size, riskiness and interconnectedness.
On Friday, the Basel Committee on Banking Supervision said there would be four primary capital buckets that institutions would be placed into, with some firms required to hold an additional 1% in capital, and others required to hold 1.5%, 2% or 2.5%.
Additionally, the Basel Committee said there would be a fifth bucket of 3.5% for firms that increase their potential threat to the world economy, but specified that no firm would yet qualify for that added capital requirement.
The question is hardly academic. Depending on which capital bucket firms fall into could make significant differences in how much capital they have to hold.
And while regulators said the surcharge would not be fully phased in until November 2016, analysts said firms would likely have to hold the additional capital much sooner due to market expectations.
"As is always the case with these requirements, named banks are under an immediate gun to raise it in the market," said Karen Shaw Petrou, a managing partner at Federal Financial Analytics. "That's the real issue. They can say that they are phasing it in from a regulatory point of view, but investors look now because capital later is a cost to investors later. The market impact is always immediate."
Adding yet more uncertainty were comments by Federal Reserve Board Gov. Daniel Tarullo, who emphasized that the current list of systemically important banks would not be used to determine a firm's surcharge. Instead, he said it will be based upon data collected in 2014 since the "inclusion and ordering of the firms should be based upon the characteristics of the banks as they have evolved closer to the effective date."
"Some banks have changed their profiles materially in the past couple of years, and the prospect of capital surcharges may be an incentive for others to do so as well," Tarullo said in a speech. "The use of more up-to-date data means that banks will not know for some time exactly which buckets they will occupy when the surcharge first phases in."
The Basel Committee is expected to provide further information on thresholds of each bucket in 2014.
While only 29 institutions were named, the FSB said it had examined a pool of 73 financial firms that were candidates to be considered systemically important.
Going forward, the FSB will update its list of such firms each November and promised to continue to monitor the 73 banks under its purview every three years.
"The list of G-SIBs will not be fixed — there can be new entries and exits every year, as well as movements among buckets," the FSB wrote. "This should provide incentives for banks to reduce their systemic importance."
The names of the systemically important firms, meanwhile, were mostly as expected. Eight U.S. institutions were named: Bank of America Corp., Bank of New York Mellon, Citigroup Inc., Goldman Sachs, JPMorgan Chase & Co., Morgan Stanley, State Street, and Wells Fargo.
The rest comprised of a mix of foreign counterparts including Belgium bank Dexia, along with Italy's Unicredit group SA, Spain's Banco Santander SA, and Germany's Deutsche Bank AG and Commerzbank AG. Three Japanese banks and the Bank of China also made the list.
The announcement was a part of several policy measures that leaders of the G-20 signed off on during their summit in Cannes, France as they hoped to strike an agreement to stabilize the European bloc.
Regulators hailed the agreement as "critical and necessary" in ensuring the safety of the global financial system.
"The measures adopted by the committee to increase G-SIBs' ability to absorb losses will help to reduce their probability of failure," Stefan Ingves, chairman of the Committee and governor of Sweden's central bank, Sveriges Riksbank said in a press release. "Complete and globally consistent implementation of these measures will be essential for a safer and sounder banking system and will contribute to broader financial system stability."
G-20 leaders also reiterated their commitment to implement Basel III rules fully and on time as part of their overall goals. Under the Basel III plans, all financial firms would be required to hold 7% in common equity by 2019 (the surcharge would come on top of that mandate.)
"We are determined to make sure that no financial firm is 'too big to fail' and that taxpayers should not bear the costs of resolution," the G-20 said in its declaration following the two-day summit. "We will implement the FSB standards and recommendations within the agreed timelines and commit to undertake the necessary legislative changes, step up cooperation amongst authorities and strengthen supervisory mandates and powers."
Regulators attempted to address some of the concerns aired by industry on its methodology for determining a firm's systemic importance, promising it would disclose further information, as well as the cut-off score of being a G-SIB and threshold scores for each of the buckets by November 2014.
"This will provide those banks subject to the additional loss absorbency requirements on this date with an appropriate capital planning horizon and address concerns about transparency," the FSB said.
The 27-member body also made changes to improve how such institutions would be identified, but noted that some of those adjustments would be tested.
"It should be stressed that identifying systemic importance is a process that is at an early stage of development," the Basel Committee on Banking Supervision wrote. "The indicators do not measure precisely specific attributes of G-SIBs, but, rather, are proxies designed to identify the main aspects of G-SIB status."
The FSB and the Basel Committee also addressed issues that the new capital rules will curb economic growth.
"The enduring global economic benefits of greater resilience of these institutions far exceed the modest temporary decline of GDP over the implementation horizon," they wrote.
Other measures signed off by the G-20 would establish a new international standard to reform national resolution regimes; requirements to resolve institutions that have cross-border agreements so that home and host authorities of G-SIFIs are better prepared for dealing with a crises; and more intensive supervision of all SIFIs.
"G-20 endorsement of the policy measures marks a major milestone," said Mario Draghi, chairman of the Financial Stability Board, in a press release. "Full and consistent implementation of these policies will lower the probability and impact of SIFI failure, and address moral hazard risks by enabling financial institutions at the core of the global system to be resolved without disrupting the real economy and imposing costs on taxpayers." Firms identified as the first batch of G-SIFIs will have to meet their resolution requirements by the end of 2012, although countries do have some discretion to offer institutions more time if needed.
Separately, regulators also stressed the necessity of having consistent implementation to make these policy measures effective.
"The measures adopted by the committee in the present rules text address the first objective requiring an additional cushion of capital helping to reduce the likelihood of failure."
