Bloomberg News

Banks Face Up to 2.5 Percentage Point Buffer in Basel Accord

June 26, 2011

(Adds FSB meeting in seventh paragraph.)

June 26 (Bloomberg) -- Global regulators said banks deemed too big to fail must hold as much as 2.5 percentage points in additional capital as part of efforts to prevent another financial crisis. As many as 30 banks may face some level of surcharges, according to a person familiar with the discussions.

The additional capital buffers will range from 1 percentage point to 2.5 percentage points, the Basel Committee on Banking Supervision said in a statement yesterday. From 28 to 30 banks, including as many as eight in the U.S., may face surcharges, said the person, who declined to be identified because the talks are private.

Regulators are at loggerheads with some banks over the additional capital rules, with lenders arguing the requirements may harm the global economic recovery. Many banks are “vigorously lobbying” against being branded as systemically important, Sheila Bair, chairman of the U.S. Federal Deposit Insurance Corp. told U.S. lawmakers on June 22.

“It’s the best possible outcome for U.S. banks given the way the regulators were pushing for high capital levels,” Charles Peabody, an analyst with New York-based Portales Partners LLC, said in a phone interview. The 2.5 percent maximum surcharge is the most that European banks can withstand as they’re “less well-capitalized” than U.S. banks and more exposed to risky sovereign debt, Peabody said.

The Basel committee has said internationally active banks should hold core Tier 1 Capital of 7 percent of their risk- weighted assets, and the additional requirements are for banks it considers systemically important financial institutions, or those whose collapse would harm the global economy.

‘Moral Hazard’

The agreements “will help address the negative externalities and moral hazard posed by global systemically important banks,” Jean-Claude Trichet, president of the European Central Bank and the group that oversees the Basel Committee, said in the statement following a meeting in Basel, Switzerland. Bank of England Governor Mervyn King will succeed Trichet, who is retiring as ECB president, as head of the Basel supervisory group later this year, the committee said yesterday in a separate statement.

The surcharge plans will be reviewed by the Financial Stability Board and then be issued for public comment, the Basel group said. The FSB, which brings together finance ministry officials, central bank governors and regulators from the Group of 20 countries, is leading international efforts to rein in systemically important banks.

Bank of America, Citigroup

At least eight banks may face the 2.5 percent levy including the three largest U.S. banks, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc., Peabody said. HSBC Holdings Plc and Deutsche Bank AG are also among lenders facing the highest levy, Morgan Stanley analysts said in a June 19 note.

Citigroup, the third-largest U.S. bank, could drop to a lower surcharge if Chief Executive Officer Vikram Pandit is successful in selling off more than $300 billion of troubled assets in the Citi Holdings division and spinning off the Morgan Stanley Smith Barney joint venture, Peabody said. Jon Diat, a Citigroup spokesman, declined to comment yesterday.

The Basel committee will release more details on the capital buffers “around the end of July,” the group said in its statement. That document won’t identify banks that could face a surcharge, said a person familiar with the discussions.

Systemic Importance

The data available to regulators to measure a bank’s systemic importance are based on older figures and the final list of lenders facing surcharges may change, said two people familiar with the discussions. The list may also change as banks shrink or adapt their businesses, said one of the people.

The extra fee must be met by banks building up their core reserves, and not by issuing so-called contingent capital instruments such as CoCo bonds, the committee said.

The Basel group said banks should meet the extra requirement using common equity, a measure of their core reserves which is made up mainly of ordinary shares and retained earnings. So-called contingent convertible bonds that convert into ordinary shares when a bank’s reserves fall below a certain level, won’t be eligible, the committee said, adding that national regulators are free to include them in any separate requirements they impose.

‘Strong Reliable Banks’

“It is still too early to tell” whether CoCos will be accepted by the markets, Ewald Nowotny, Austria’s central bank governor who isn’t a member of the Basel committee, said in a telephone interview. It is something which might be an interesting instrument for “strong reliable banks,” he said.

Global regulators will “continue to review” contingent capital, the committee said, and supports its use to meet “higher national loss absorbency requirements.”

Central bankers ultimately rejected including contingent capital in the surcharge because there wasn’t enough experience with the securities to see how they would serve as a buffer in a time of crisis, said one person involved in the talks. The group agreed to a request by several nations to keep the securities under study, and endorsed plans by Swiss regulators to allow banks to use CoCos to satisfy national rules that are stricter than the Basel recommendations, the person said.

‘Mixed Feelings’

“There are mixed feelings” about CoCos with the European Central Bank, said Austria’s Nowotny. It is for local regulators to decide to what extent they want to rely on this instrument, he said.

U.S. banks should be able to achieve the required ratios without selling stock to raise new capital and diluting current shareholders’ stakes, Peabody said.

Brian T. Moynihan, CEO of Bank of America, the largest U.S. bank, may sell part of the firm’s $21 billion stake in China Construction Bank Corp. to bolster capital before the Basel standards take effect, three people familiar with the matter said earlier this month. Jerome Dubrowski, a spokesman for the lender, had no immediate comment.

While the largest surcharge that banks will initially face will be 2.5 percentage points, this number would rise to 3.5 percentage points if lenders facing the highest buffers increase in size, the Basel committee said. The 3.5 percentage point fee would act as a “disincentive for banks facing the highest charge to increase materially their global systemic importance,” it said. The new requirements will be introduced with other measures from Jan. 1, 2016, through Jan. 1, 2019.

Banks’ systemic importance will be assessed by measuring their size, interconnectedness with other financial institutions, the difficulty for another institution to take over the role they play in the market, complexity and global activity, the Basel group said.

The extra capital requirements are “probably not that big of a burden considering the funding advantage that banks have when the markets consider them too big to fail,” said Jesper Berg, senior vice president at Denmark’s biggest mortgage bank, Nykredit A/S.

--With assistance from Meera Louis in Washington and Donal Griffin in Washington. Editors: Anthony Aarons, David Scheer

To contact the reporters on this story: Jim Brunsden in Brussels at; To contact the reporters on this story: Craig Torres in Washington at

To contact the editor responsible for this story: Anthony Aarons at

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