Bloomberg News

Basel Levy for Systemic Banks Won’t Hit Recovery, Regulators Say

October 10, 2011

Oct. 11 (Bloomberg) -- Capital surcharges of as much as 2.5 percentage points on the world’s biggest banks will have only a “modest impact” on the economic recovery and may eventually help spur growth, according to global regulators.

The proposals, coupled with other rules to force banks to build up their reserves, will cut economic output by a maximum of 0.34 percent during a transition period, the Basel Committee on Banking Supervision and the Financial Stability Board said in a report yesterday. Longer term, the combined plans will bolster output by as much as 2.5 percent a year because of the reduced risk of financial turmoil.

The permanent benefits from the two measures would be “many times the costs of the reforms in terms of temporarily slower annual growth,” the regulators said. Given the “unique role” of systemic banks, “it could be argued” that the report underestimates the initial impact of the measures. “But if this is the case, then the benefits from strengthening their balance sheets, and thereby reducing the risk of a devastating financial crisis, should be greater as well.”

Regulators have clashed with lenders including HSBC Holdings Plc, BNP Paribas SA and Citigroup Inc. over the plans, with banks warning that the measures may constrain lending and hurt the economy. Jamie Dimon, chief executive officer of JPMorgan Chase & Co. has said that the U.S. should consider withdrawing from the Basel committee and that the rules it sets are “anti-American.”

The Basel committee agreed to press ahead with the surcharges at a meeting last month, while proposing changes to how they calculate the size of levies individual banks should face. As many as 28 banks may face the extra capital rules, the group has said, without naming the lenders. The FSB endorsed the surcharge plans at a meeting in Zurich last week.

Interconnectedness

Banks would face surcharges based on their size, interconnectedness, complexity, global reach, and the ability of other firms to take over lenders’ functions if they fail. The proposals will be sent by regulators for approval by the Group of 20 countries at a summit on Nov. 3 and 4.

“Additional capital requirements have consequences for the ability of banks to provide support to the real economy,” HSBC, Europe’s largest bank, said in response to a consultation on the plans by the Basel committee that closed in August. The plans may discourage banks “from facilitating global trade,” Citigroup said.

Lenders have also complained that the method for calculating the surcharges has been poorly designed, including that it is too focused on banks’ size, while Goldman Sachs Group Inc. has said that the plans could “exacerbate apparent inconsistencies that already exist” between how different banks calculate the capital they must hold.

Tripling of Capital

The surcharge plans come on top of a tripling of minimum capital rules for all internationally active banks, known as Basel III, that was agreed on by the Basel committee last year.

Each one percentage point increase in the amount of capital that big banks have to hold above Basel III will initially lower economic output by “less than one one-hundreth of a percentage point,” according to yesterday’s report.

Banks in the 27-nation European Union will need to raise an extra 423 billion euros ($578.8 billion) by 2019 to comply with the Basel III requirements, according to an impact study by the European Commission.

Basel III will be phased in between Jan 1. 2013 and 2019, while the Basel group anticipates phasing in the surcharges for the biggest banks between 2016 and the end of 2018.

--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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