Bloomberg News

Twenty-Eight Banks Qualify for Basel’s Too-Big-to-Fail Surcharge

July 19, 2011

July 20 (Bloomberg) -- Twenty-eight banks would face capital surcharges if international rules to rein in too-big-to- fail lenders were applied today, global regulators said.

The Basel Committee on Banking Supervision disclosed how authorities will apply the levies for the world’s most systemically important banks, guiding investors in calculating extra funds that the lenders must raise. The Financial Stability Board yesterday published separate plans to ensure the orderly winding down of failed banks and shield taxpayers from bailing them out.

“Based on the current rules of applying the assessment methodology, 28 banks would be subject to the additional loss absorbency requirement due to their global systemic importance,” the Basel group said on its website yesterday. The surcharge plans were endorsed by the FSB in Paris on July 18.

Regulators are at loggerheads with some banks over the additional capital rules, with lenders arguing the requirements may harm the global economic recovery. Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Bank of America Corp. CEO Brian T. Moynihan are among bankers who have suggested that the new rules will constrain lending and hurt the economy.

The Basel Committee is seeking views on its formula for determining which lenders should have to hold from 1 to 2.5 percentage points more capital according to the risk they pose to the global economy.

At least four lenders would currently qualify for the highest level of surcharge, the group said. The number of companies covered by the rules will “likely evolve over time as banks change their behavior,” it said.

Morgan Stanley

HSBC Holdings Plc, Citigroup Inc., Deutsche Bank AG and BNP Paribas SA may face the highest additional capital requirements, Morgan Stanley analysts said in a note last month. Other lenders that may be subject to the highest surcharge include Bank of America, JPMorgan, Barclays Plc and Royal Bank of Scotland Group Plc, Morgan Stanley said.

Banks that fail to meet the surcharge rules face curbs on paying out dividends, the Basel Committee said. Those lenders would also have to bolster their reserves within deadlines set by national regulators.

CoCo Bonds

Banks will be obliged to use core Tier 1 capital to meet the surcharge rules. This mainly includes ordinary shares and retained earnings, the Basel Committee said.

Contingent convertible bonds, known as CoCos, won’t be allowed to count toward the requirements as they are “largely untested,” the Basel group said. CoCos are bonds that convert into ordinary shares when a bank’s reserves fall below a certain level.

“It will not take long for analysts to come up with their own lists of which banks are likely to be affected,” Markus Heidinger, a partner dealing with financial regulation at law firm Wolf Theiss in Vienna, said in an e-mail.

The Basel group said the surcharges are necessary because of the threat systemically important lenders would pose to the global economy if they failed.

They “will enhance the going-concern loss absorbency of global systemically important banks and reduce the probability of their failure,” Stefan Ingves, the Basel Committee’s chairman, said.

The Basel Committee’s publication could further increase pressure on some lenders to raise their capital levels following last week’s publication of the European Union’s bank stress tests.

Deutsche Bank, Royal Bank of Scotland, Societe Generale SA and UniCredit SpA may face pressure from investors to boost capital after scraping through the exams, according to analysts.

Additional Costs

“For banks qualified as systematically important there are two sides to the coin: the downside will be additional costs, the upside could be a positive label of being higher capitalized and a positive effect on ratings,” Heidinger said.

Banks will face surcharges based on their size, interconnectedness with other institutions, scale of their international activities, complexity and ability to be substituted by other companies, the Basel Committee said.

The additional capital rules would be applied on top of requirements for all internationally active lenders that were set last year by the Basel Committee. It set a deadline of Aug. 26 for comments.

The FSB proposals include granting regulators “statutory bail-in” powers to impose losses on bondholders at failed lenders.

Bondholder Losses

The board asked for comments on how the normal compensation hierarchy for creditors may hamper efforts to wind down failing banks, according to a website statement. The FSB set a deadline of Sept. 2 for responses.

The Basel Committee said last month that it had completed its work on the capital surcharge rules, and sent them onto the FSB for approval. The FSB brings together finance ministry officials, central bank governors and regulators from the G-20 countries.

--Editors: Peter Chapman, Steve Bailey

To contact the reporters on this story: Jim Brunsden in Brussels at

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

Cash Is for Losers
blog comments powered by Disqus