Bloomberg News

Dombret Sees 2% to 3% Capital Buffer for 30 Largest Banks

June 17, 2011

(Updates with ING CEO comment from in 15th paragraph.)

June 17 (Bloomberg) -- Bundesbank board member Andreas Dombret expects capital buffers of 2 to 3 percentage points for banks deemed too-big-to-fail because their collapse could endanger the wider financial system and hurt economic growth.

Regulators “should start with only those institutions that are indisputably of global systemic relevance. I expect this to be a group of some 25 to 30 banks -- not more and not less,” Dombret said today in a speech in Eltville, Germany. “I expect that at the end of the day the amount of additional capital required from a SIFI will be related to its systemic importance and will in all likelihood lie somewhere between 2 and 3 percent.”

The Group of 20 nations agreed in November that systemically important financial institutions, or SIFIs, should face tougher capital rules than other banks, increasing their ability to take losses without failing. The extra reserve requirement would go beyond capital rules for internationally active lenders published last year that require banks to hold core capital equivalent to 7 percent of their risk-weighted assets.

Federal Reserve

Governments are split over how to toughen bank capital rules following the worst financial crisis since the Great Depression. The Federal Reserve has backed a graduated surcharge with a maximum of 3 percentage points, a person familiar with the talks said last week. Financial shares fell when traders interpreted June 3 remarks by Fed Governor Daniel Tarullo as leaving the door open to surcharges of as much as 7 percentage points.

The Basel Committee on Banking Supervision has been charged by the Financial Stability Board with drafting the requirements. The surcharge figures will be discussed further at meetings next week in Basel, Switzerland, with some countries pushing for weaker requirements, people familiar with the matter said yesterday.

“As experience is gained, we might later extend the framework in an appropriate manner to other SIFIs,” Dombret, who acts as Bundesbank President Jens Weidmann’s deputy in the Financial Stability Board, said. This might include “financial institutions of domestic relevance, financial market infrastructures, insurance companies and other non-bank financial institutions.”

Contingent Capital

The surcharge would take the form of a boost to capital the systemically important banks must hold and would apply to financial institutions whose collapse would harm the global economy. A list of such banks hasn’t been disclosed.

Dombret said while common equity appears to be the “natural choice” for additional charges, other instruments such as contingent capital should be included. “Contingent capital, when properly designed, is likely to represent a major step forward in providing additional loss absorbency,” Dombret said.

Contingent convertible bonds, or CoCos, automatically become equity when capital falls below preset levels and Swiss banks such as Credit Suisse Group AG sold the bonds this year to strengthen their finances.

Restructuring, Resolution Regimes

“It is indispensable to finalize, and then implement without delay, the FSB framework for dealing with SIFIs,” Dombret added. “Secondly, we have to introduce internationally compatible restructuring and resolution regimes for financial institutions to allow them to exit the market in an orderly fashion without causing a breakdown of the system.”

Banks among the 30 largest by market value include HSBC Holdings Plc, JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Banco Santander SA, UBS AG, Mitsubishi UFJ Financial Group Inc., Royal Bank of Scotland Group Plc, Deutsche Bank AG and Barclays Plc, according to Bloomberg data.

The Basel Committee is planning a sliding scale that would be split up into several so-called buckets, into which different lenders would be placed. Banks wouldn’t initially face the highest surcharge, which is intended as a deterrent to expansion, a person familiar with the negotiations said yesterday.

Dombret said one difficulty is accurately identifying SIFIs based on criteria such as size, interconnectedness, substitutability and complexity.

ING Range

ING Groep NV Chief Executive Officer Jan Hommen said on a call with analysts today that the Netherlands largest financial services company expects to face a surcharge. The “first indications we have is that we will be a SIFI but in the lower ranges,” of the sliding scale, he said.

Proposals have been made for the surcharges banks will face

run “from 0.5 percent to the top, like 3 percent,” Hommen said.

The Financial Times reported today that the surcharge would cover around 30 of the world’s biggest banks, citing three people briefed on the discussions. Under plans being considered by global regulators, Citigroup, JPMorgan, Bank of America Merrill Lynch, Deutsche Bank, HSBC, BNP Paribas SA, RBS, and Barclays would face capital surcharges of 2.5 percentage points, the FT said.

Goldman Sachs Group Inc., Morgan Stanley, UBS AG and Credit Suisse Group AG would be in the next tier of the sliding scale, facing surcharges of 2 percentage points. Another 10 to 15 banks are likely to face surcharges ranging from 0.5 to 2 percentage points, the FT reported.

The Basel Committee is also considering setting capital requirements of as much as 3.5 percentage points that the largest banks may face if they grow bigger, two people familiar with the talks said yesterday.

The committee’s intention is that the surcharges applied to individual banks would be regularly updated in light of lenders’ changing profiles, the people said. The Basel committee’s press office declined to comment.

--With assistance from Jim Brunsden in Brussels, Maud Van Gaalin Amsterdam. Editors: Frank Connelly, Anthony Aarons

To contact the reporters on this story: Christian Vits in Frankfurt at cvits@bloomberg.net; Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net.

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; Frank Connelly at fconnelly@bloomberg.net;


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