Bloomberg News

Global Capital Surcharge May Affect 26 Firms, Memo Says

June 02, 2011

(Adds comment from JPMorgan’s Dimon in sixth paragraph.)

June 2 (Bloomberg) -- As many as 26 financial firms could be forced to hold extra capital to avoid collapses that would threaten global financial stability, according to a participant at a meeting of the Financial Stability Board last week.

“We understand that it is likely that the number will be in the 15-26 range,” Tim Ryan, chief executive officer of the Global Financial Markets Association, a finance-industry group, said in a memo sent to board members following the meeting in Frankfurt. “Though a capital buffer is likely, the structure, amount and implementation timeline is still undecided,” Ryan said in the memo, obtained by Bloomberg News.

The Basel Committee on Banking Supervision is discussing forcing so-called global systemically important financial institutions to hold additional capital buffers equivalent to as much as 3 percent of risk-weighted assets, people familiar with the negotiations said in March. New York-based GFMA, whose board includes executives from Morgan Stanley and Goldman Sachs Group Inc., says the surcharge will suppress returns on equity that will already be under pressure from new capital requirements that will apply to all banks, not just the largest.

“Our argument to regulators is that until you know the cumulative impact of what you are requiring, it just doesn’t make any sense to add in more,” Ryan said in a telephone interview. “We don’t really know what the right number is, and they don’t really know.”

Jamie Dimon, chairman and chief executive officer of JPMorgan Chase & Co., warned that raising capital requirements will distort markets.

Impact on Credit

“You’re going to end up with 10 percent capital for banks like us,” Dimon said at the Sanford C. Bernstein & Co. investor conference today in New York. “It will have ramifications on what people pay for credit, what banks hold on balance sheets.”

Toby Parker, spokesman at the U.K. Financial Services Authority in London, declined to comment. The press service for the FSB, based in Basel, Switzerland, didn’t respond to a voicemail message. Barbara Hagenbaugh, spokeswoman for the Federal Reserve, and Natalie Wyeth, a spokeswoman for the U.S. Treasury, both declined to comment.

Ryan’s memo said the FSB will ask for public comment in July in order to decide on the methodology for identifying systemically risky global firms in time for a meeting of the Group of 20 nations in November.

“I don’t think there is a final determination” on the number, Ryan said in the interview. “Our best intelligence is that it is a lower number.”

Risk Management

Central bankers and financial supervisors from around the world are hammering out new capital, liquidity and risk- management standards for banks. The accord is known as Basel III, named after the city where the meetings are held. The agreement will be phased in over the next decade.

The officials last year agreed to more than double the minimum common equity requirement for banks to 4.5 percent from 2 percent of assets weighted for risk. Banks will also be asked to maintain a “capital conservation” buffer of as much as 2.5 percent common equity in periods of “excess credit growth,” bringing total common equity requirements to as high as 7 percent of assets weighted for risk. The capital buffer for systemically important firms would come on top of this new standard.

Basel regulators said last year that rules on capital requirements would have forced financial institutions to raise 602 billion euros ($871 billion) of capital had they been in place in 2010.

Summary Agenda

The meeting of the FSB, which brings together regulators and finance ministries from the Group of 20 nations, was led by FSA Chairman Adair Turner, according to the FSB’s summary agenda attached to Ryan’s memo.

The negotiations were attended by more than 50 people, including Barclays Plc Chief Executive Officer Robert Diamond and Jacob Frenkel, chairman of JPMorgan Chase International. They took place at the European Central Bank in Frankfurt and lasted for four hours starting at about 8:30 a.m. on May 25.

Ryan said regulators want a surcharge for the largest banks because they aren’t confident they have a way to wind them down in case of a crisis.

“We know we have to improve resolvability,” Ryan said in the interview. “That does not necessarily mean we need to pile on additional capital.”

--With assistance from Dawn Kopecki in New York. Editors: Christopher Wellisz, Steve Dickson

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomgerg.net; Ben Moshinsky in London at bmoshinsky@bloomberg.net

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; Anthony Aarons at aaarons@bloomberg.net.


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