Bloomberg News

Basel Committee Keeps 2.5 Percent Surcharges for Big Banks

September 28, 2011

(Updates with comment from banker in ninth paragraph.)

Sept. 28 (Bloomberg) -- Global regulators will stick to planned capital surcharges of as much as 2.5 percent for the world’s biggest banks while adjusting how the levies are calculated.

The Basel Committee on Banking Supervision decided against changing the surcharge levels during talks today and yesterday amid criticisms from banks including BNP Paribas SA and Citigroup Inc. that the measures may stymie the financial system’s recovery. Regulators at meetings in Basel, Switzerland, also agreed to accelerate work on a minimum liquidity rule to provide “greater market certainty.”

Regulators “agreed to retain the proposed calibration for the additional loss absorbency requirement, which will range from 1 percent to 2.5 percent,” the committee said in a statement on its website. The group proposed making “some changes to certain indicators to improve the methodology for identifying” what size of levies individual banks should face.

Bank watchdogs have clashed with some lenders over the additional capital rules, which were released for public comment in July. Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Bank of America Corp. CEO Brian T. Moynihan, 51, are among bankers who have said that the proposals would constrain lending and hurt the economy. Dimon, 55, has said that the U.S. should consider withdrawing from the Basel committee and that the rules it sets are “anti-American.”

‘More Capital’

The Basel group brings together bank regulators from 27 countries including the U.S., U.K. and China, to set international standards for lenders.

“One has to question whether this is the best time to be asking banks to hold more capital,” James Babicz, head of risk at business analytics company SAS U.K., said in an e-mail.

“The focus should not be on regulating capital. Rather we should be regulating banks’ data in order to supervise the risk,” Babicz said.

The Basel group said that it was speeding up work on the minimum liquidity rule, known as a liquidity coverage ratio, in order to “provide greater market certainty about the final technical details and calibration” of the measure.

“There is a growing realisation that the LCR is going to be a challenge, particularly in a market where senior bank funding is frozen in Europe,” said Jesper Berg, senior vice president at Denmark’s biggest mortgage bank, Nykredit A/S.

Work on “key areas” of the liquidity rule, which will require banks to hold enough easily sellable assets to survive a 30-day funding crunch, will now be completed “well in advance of the mid-2013 deadline” for finalizing the standard, the committee said. The LCR is scheduled to take effect from Jan. 1, 2015.

‘Massive Uncertainty’

“There was massive uncertainty in the market about what would and would not count as liquidity, and they are saying they will provide that clarity,” said Simon Maughan, head of sales and distribution at MF Global Ltd. in London. “This uncertainty was a big issue for the French banks over the summer. These liquidity ratios are a bigger issue than even the capital requirements are.”

The Basel group will examine how banks measure the riskiness of the assets on their banking and trading books to ensure that capital rules are applied consistently “in practice and across jurisdictions.”

The Basel committee said last year that banks should hold core capital equivalent to 7 percent of their risk weighted assets.

JPMorgan’s Dimon has said that some lenders outside the U.S. have been allowed to get away with holding less capital because in their jurisdictions they are allowed to apply risk weightings in a different way.

Global Trade

BNP Paribas, France’s biggest bank, said in its response to the Basel consultation that the surcharge proposals should be put on hold indefinitely. The plans could discourage banks “from facilitating global trade,” Citigroup said in its submission.

The Basel group anticipates phasing in the surcharges between 2016 and the end of 2018.

European bank stocks fell today amid concern that holders of Greek bonds will suffer larger losses than previously agreed on. Austria’s Raiffeisen Bank International AG and Erste Group Bank AG led the 46-member Bloomberg Europe Banks and Financial Services Index down 1.8 percent. The measure has dropped 31 percent this year.

Shock Waves

Under the surcharge proposals, lenders whose failure could send shock waves throughout the financial system would face stricter minimum capital requirements of 1 to 2.5 percentage points of core reserves. This would be on top of an already- announced tripling in the amount of core capital that all internationally active banks must hold.

The levies would be calculated using a methodology based on banks’ size, interconnectedness, complexity, global reach, and the ability of other firms to take over lenders’ functions if they fail.

Today’s decision by the Basel committee “eases somewhat the way the rules will be applied to banks but not as much as they wanted,” said Charles Peabody, an analyst at Portales Partners LLC in New York.

The Basel committee said that banks in future could face surcharges of up to 3.5 percent if they allow themselves to grow even bigger or more systemically important.

This possibility won’t be exercised when the surcharges are initially applied, and will be kept as a deterrent, the committee said.

Cannes Summit

The Financial Stability Board, which includes regulators, central bankers and financial-ministry officials from the Group of 20 countries, has said that work on the surcharge rules should be finished in time for them to be approved at a summit of leaders from the G20 in Cannes, France, on Nov. 3-4.

The FSB last year instructed the Basel committee to draw up the rules. The FSB next meets on Oct. 3.

The Basel committee said today it will publish details of its surcharge plans “before” the G20 summit. Potential changes “will be subject to additional testing by March 2012 using updated bank data,” the committee said.

The group will seek views “in the coming weeks” on rules for how much capital banks should hold to protect themselves from the risk that a derivatives clearinghouse may default, the committee said in today’s statement.

The committee will also “publish shortly” data on how well nations have implemented capital rules for banks, both to see whether deadlines are being respected and to “identify differences that could raise level-playing-field concerns.”

Governments including the U.K. and Sweden have said that European Union plans published in July may not sufficiently respect agreements reached in Basel last year.

The European Commission, the 27-nation EU’s executive arm, has said that it may deviate from draft liquidity rules and a binding indebtedness limit agreed by the committee.

--With assistance from: Gavin Finch in London and James Sterngold in New York. Editors: Peter Chapman, Anthony Aarons

To contact the reporters on this story: Jim Brunsden in Basel at jbrunsden@bloomberg.net;

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.


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