Regulators Give Big Banks a (Little) Break on Capital Surcharge

WASHINGTON — International regulators eased back slightly on a proposed capital surcharge for the largest institutions, setting a range below the expected 3%.

In a statement released Saturday by the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, regulators said the surcharge will be within a range of 1% to 2.5%, depending on a bank’s systemic importance.

But regulators did leave themselves leeway to charge a higher figure if banks continue to "increase materially their global systemic importance," saying they may levy an additional 1% surcharge in such circumstances.

"The 1% added surcharge is the penalty box global regulators have erected to deter behemoths from getting even bigger," said Karen Shaw Petrou, managing director of Federal Financial Analytics.

Still, the announcement was nearly as good as banks could expect given that some European regulators, such as Britain and Sweden, had been lobbying for an even higher range beyond 3%. U.S. regulators, too, including Federal Deposit Insurance Corp. Chairman Sheila Bair and Federal Reserve Board Gov. Dan Tarullo, had appeared to favor a minimum 3% surcharge.

Regulators also plan to give banks plenty of time to transition to the new requirements, saying they will not be fully effective until Jan. 1, 2019. That parallels broader Basel III requirements, which will require all internationally active banks to hold common equity of 7% by 2019.

The capital surcharge would be levied on top of that figure, meaning that the largest banks will have to hold between 8% and 9.5% based on their risk profile. International regulators said they would base the final decision for individual institutions based on five categories: size, interconnectedness, lack of substitutability, global activity and complexity.

"These measures will strengthen the resilience" of systemically important financial institutions and "create strong incentives for them to reduce their systemic importance over time," the Group of Governors and Heads of Supervision said in a press release.

The agreement now heads to the Financial Stability Board, which is expected to release a proposal for comment by the end of next month.

Regulators also signaled that they are willing to accept alternative forms of capital, including hybrid instruments such as contingent capital, to meet the surcharge requirements. U.S. regulators did not favor such an approach, but European supervisors have been lobbying hard to include such instruments.

The group left the issue somewhat open, saying they will "continue to review contingent capital, and support the use of contingent capital to meet higher national loss absorbency requirements than the global minimum."

Regulators touted the agreement as a critical step toward preventing the next financial crisis.

"The proposed measures will increase the going-concern loss absorbency of" SIFIs, said Nout Wellink, chairman of the Basel Committee on Banking Supervision. "This will contribute to enhancing the resiliency of the banking system and help mitigate the wider spill-over risks of global systemically important banks."