Aug. 30 (Bloomberg) -- Global regulators should scale back plans to impose capital surcharges of as much as 2.5 percentage points on banks that would cause global financial system turmoil if they failed, because the requirements may damage economic recovery, a group representing European lenders said.
Proposals made in July by the Basel Committee on Banking Supervision should be redrafted to allow banks to use so-called contingent capital to meet the obligations, the European Banking Federation said in a letter seen by Bloomberg News. They should also be changed so lenders that can’t meet the requirements don’t immediately face restrictions on their ability to pay dividends and bonuses, the EBF said.
Without changes, the overall amount of capital required of systemically important banks will be “far beyond manageable limits,” the EBF said in the letter, dated Aug. 26 and submitted to the Basel committee. “The framework may actually weaken financial stability unless capital surcharges are kept low while the remaining problems are carefully studied and solved.”
Regulators are seeking to mitigate the risk of a repeat of the 2008 collapse of Lehman Brothers Holdings Inc. which resulted in the interbank lending market freezing and lenders receiving government bailouts. The Basel committee, which brings together regulators from countries including the U.S., U.K. and China, last month published plans to force such systemically important banks to hold capital above internationally approved minimum levels. The committee gave lenders until Aug. 29 to comment on the plans.
As many as 28 banks would face surcharges from 1 to 2.5 percentage points of capital, if the plans were applied today, the Basel committee said. The rules are to be phased in, with full implementation by Jan. 1, 2019. Banks would have to meet the extra reserves using common equity, a definition of capital made up mainly of a lenders ordinary shares and retained earnings.
Contingent capital consists of bonds issued by a bank that can either be written down or converted into equity should a specific trigger event occur. The Basel committee last month ruled out allowing such securities to count toward the surcharge, pending further study, because of uncertainty over how well they absorb losses.
Some of the EBF’s concerns have been echoed by the British Bankers’ Association in its submission to the Basel committee.
The economic cost of requiring the buffer to be met solely with common equity “would be significant,” the BBA said in a separate letter obtained by Bloomberg. “It is vital that contingent capital is retained as an option,” it said.
The Basel group’s method for calculating which banks should face surcharges is too focused on a lenders’ size, the EBF, which represents national banking associations in the 27-nation EU, said.
“Smaller banks and groups of banks whose failure may well pose a threat to financial market stability are not taken into account,” it said.
Regulators should also publish the names of the lenders that must hold additional reserves, the EBF said.
--Editors: Christopher Scinta, Anthony Aarons
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