Bloomberg News

Too-Big-to-Fail Bank Definition May Be Expanded by Regulators

January 12, 2012

Jan. 11 (Bloomberg) -- Global regulators may expand the definition of a too-big-to-fail financial firm, signing up domestic lenders, clearing houses and insurers to capital rules designed for the world’s biggest banks.

The “framework should be in place for domestically systemically important banks by the end of the year,” Mark Carney, chairman of the Financial Stability Board, said yesterday after a meeting of the group in Basel, Switzerland.

Deutsche Bank AG, BNP Paribas SA and Goldman Sachs Group Inc. were among 29 banks subject to the so-called capital surcharge on globally systemic financial institutions drawn up by the FSB in November. Banks will have to boost reserves by 1 to 2.5 percentage points above minimum levels agreed on by international regulators.

“The world contains a whole slew of institutions like that which are not systemic on a global level but are on a national level,” Simon Gleeson, regulatory lawyer at Clifford Chance LLP, said in a telephone interview. “The institution most interesting in this regard is Erste Bank,” he said. “The more you look at it the more you think it’s systemically important to Hungary.”

Michael Mauritz, a spokesman for Erste Group Bank AG, based in Vienna, Austria, didn’t immediately respond to a message seeking comment.

Carney said that the FSB was considering putting in place tougher rules for so-called shadow banks whose failure could harm the global financial system. This work was less advanced than rules for systemic insurers, he said, adding that requirements would vary for different types of institutions.

‘Vulnerabilities’ Remain

“Despite the important steps that have been taken over the last couple of years, we are all aware that, in the short term, vulnerabilities remain,” Carney said.

Shadow banks include money-market mutual funds, special investment vehicles, credit hedge funds, securities lenders and government-sponsored enterprises, such as Fannie Mae and Freddie Mac.

The European Central Bank warned last year that shadow- banks require more scrutiny from regulators on the risks they pose to the financial system, while Michel Barnier, the European Union’s financial services commissioner, said that he will “go as fast as we can” in considering possible rules for them.

The FSB will review its work on shadow banks by March, the board said yesterday in a statement issued following its meeting.

Global regulators will also work on rules to ensure the robustness of clearing houses, the FSB said in the statement. Regulators should be able to take decisions by June on the “appropriate form” of central clearers dealing with derivatives, it said.

Bankers’ Pay

The FSB will also set up a group to examine cross-border disputes over rules governing banker pay, Carney said, acknowledging an “enduring mistrust” between banks over how lenders set their pay.

Regulators will together “address specific level playing field concerns” raised by their respective banks, the board said.

“This will be another tough year for the FSB,” Richard Reid, research director for the International Centre for Financial Regulation, said in an e-mail. “Although much of the regulatory agenda has been put in place, there remains a huge amount of work to be done on implementation.”

Carney said that the board may not replace former Swiss National Bank Governor and FSB Deputy Chairman Philipp Hildebrand, following his resignation this week over a currency trade made by his wife.

The decision will be taken “in the fullness of time and in consultation with G20,” he said.

European Capital

European regulators have demanded the regions’ banks raise 114.7 billion euros ($146.6 billion) in new capital as part of measures designed to boost their resilience during the euro area’s sovereign-debt crisis.

German banks need to raise an additional 13.1 billion euros, Italian banks 15.4 billion euros, and Spanish lenders 26.2 billion euros in core tier 1 capital, the European Banking Authority in London said in December.

The capital shortfalls include 15.3 billion euros for Spain’s Banco Santander SA and 7.97 billion euros for Italy’s UniCredit SpA. Lenders in the region have until the end of June to raise the money.

--Editors: Peter Chapman, William Ahearn

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net Ben Moshinsky in London at bmoshinsky@bloomberg.net

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


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