Bloomberg News

Big Banks May Get Funding Boost From Basel Bid to Curb Them

June 23, 2011

(Updates with FSA comment in 11th paragraph, Trichet in 12th.)

June 23 (Bloomberg) -- The biggest banks may face the stiffest additional capital requirements under plans being considered by global regulators, a premium that may give them a financing advantage over their smaller competitors.

The Basel Committee on Banking Supervision meets in the Swiss city today to discuss how much extra capital the world’s largest and most systemically important banks will be forced to hold to avert another financial crisis. About 25 banks may have to hold more than the 7 percent core Tier 1 capital required by the Basel rules, according to Morgan Stanley analysts.

While the plans may force lenders such as Deutsche Bank AG and Bank of America Corp. to hold more capital, they may conversely make it cheaper for them to borrow as the lenders will have an implicit state guarantee as being too big to fail, analysts and lawyers said. HSBC Holdings Plc Chairman Douglas Flint said in March he “absolutely” wanted Europe’s biggest lender to be classified as systemically important as it would make the bank more attractive to investors and clients.

“Everybody is worried they will be left behind by not being on the list,” said Simon Gleeson, a financial-regulation lawyer at Clifford Chance LLP in London. “It’s politically unpalatable to admit it, but there is an effective guarantee on certain firms, which only will be strengthened by the creation” of so-called systemically important financial institutions.

Wholesale Funding

Being classified as systemically important may cut the price at which a bank borrows in the wholesale money markets as well as the yield it will need to offer investors when selling bonds, analysts said.

The Basel Committee is planning a sliding scale that would be divided into several so-called buckets, into which different lenders would be placed, a person with knowledge of the negotiations said on June 16. Banks wouldn’t initially face the highest surcharge, which is intended as a deterrent to expansion, said the person, who declined to be identified because the negotiations aren’t complete.

HSBC, Bank of America, Citigroup Inc., Deutsche Bank, BNP Paribas SA, JPMorgan Chase & Co., Barclays Plc and Royal Bank of Scotland Group Plc may be subject to a surcharge of 2.5 percent, London-based analysts led by Huw van Steenis said in the report on June 19. UBS AG, Credit Suisse Group AG, Goldman Sachs Group Inc. and Societe Generale SA would be subject to a lower charge of 2 percent, the analysts said.

‘Implicit Backing’

“There is a clear argument that banks would actually prefer to be on the list than not because they enjoy the implicit backing of government, which is reflected in a far lower cost of funding,” said Richard Reid, director of research with the International Centre for Financial Regulation and the former head of Citigroup’s economics department in London. “In the short term, profitability is affected, but inclusion will help underscore your position as a leading firm.”

Some big banks have warned requiring additional capital will make them less competitive and less able to expand lending to companies and consumers. JPMorgan Chief Risk Officer Barry Zubrow called the proposed capital requirements “a bridge too far” in testimony before the U.S. Congress on June 16. Barclays Chief Executive Officer Robert Diamond told a Treasury Select Committee hearing in London on June 8 he worried “we’re making the capital levels too high.”

‘Major Step Forward’

The added capital requirements will hurt profitability, the Morgan Stanley analysts said. For every half percent of additional capital held, return on equity will be reduced by a similar amount, Morgan Stanley estimates.

Global plans to force banks to hold more capital are “a major step forward” in protecting the financial system from another crisis, Adair Turner, chairman of the U.K.’s Financial Services Authority said at a London conference today.

European Central Bank President Jean-Claude Trichet also warned yesterday in Frankfurt that risk signals for financial stability in the euro area are flashing “red” as the debt crisis threatens to infect banks.

Some investors say that following the 2008 financial crisis it is obvious which banks are too big to fail.

“As a shareholder, you already know which banks are too big to fail and which ones aren’t, or at least you should do,” said Julian Chillingworth, who helps manage about 15 billion pounds ($24.2 billion), including HSBC and Barclays stock, at Rathbone Brothers Plc in London. “Post-Lehman, you already know that the authorities are in a crisis going to rescue certain banks and not others.”

Global regulators including U.S. Federal Reserve Governor Daniel Tarullo have acknowledged that banks considered “too big to fail” enjoy an implicit subsidy in the form of cheaper funding costs though concluded this wasn’t sufficient grounds for not introducing additional surcharges for the largest banks.

Lenders that don’t make the systemically important grade may be expected by investors to hold more capital. That would offset “their ability to pick up lending share from global SIFIs, which policy makers models expect,” van Steenis said.

--With assistance from Jeff Black in Frankfurt and Jim Brunsden in Brussels. Editors: Steve Bailey, Edward Evans.

To contact the reporters on this story: Liam Vaughan in London at lvaughan6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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