Bloomberg News

Domestic Systemic Banks to Face Tougher Rules in Basel Plan

June 29, 2012

Large national banks will face tougher capital requirements and supervision under plans by global regulators to slash the risk that such lenders could fail and roil financial markets.

The Basel Committee on Banking Supervision said today that it is seeking to nail down guiding principles for supervisors of these so-called domestically systemic, or D-SIB, banks, as it published a set of draft measures for public comment. The move follows a deal by regulators last year to impose capital surcharges on a list of 29 even larger lenders whose failure posed a threat to the global economy.

“The failure of such a bank could have an important impact on its domestic financial system and economy,” the group said in a statement on its website. These lenders should face additional capital requirements “commensurate” with their systemic importance, it said.

The euro area’s efforts to contain its debt crisis have been frustrated by the weakness of some banks’ balance sheets, including small and mid-size lenders. Spain and Cyprus both sought aid this month after being unable convince markets that they would be able to withstand their lenders’ losses.

The Basel committee brings together banking regulators from 27 nations including the U.S., the U.K. and China to coordinate rule-making.

Irreplaceability

Today’s paper calls on regulators to assess whether banks they supervise are systemic based on their size, interconnectedness, complexity or irreplaceability. Based on this assessment, lenders should face additional capital requirements, which should have to be met with core reserves (EUGNEMUQ:US) such as ordinary shares and retained earnings.

The paper leaves it to national regulators to decide what the maximum level of these capital surcharges should be.

The group will seek views on the measures until Aug. 1, with the plans set to enter into force in 2016.

“Although regulators will differ in their opinions of what exactly constitutes a D-SIB, certain institutions should be clear-cut cases,” James Babicz, head of risk at business analytics firm SAS UK & Ireland, said in an e-mail prior to the publication of the Basel paper.

“Consider Nationwide Building Society in the U.K., its collapse would have a negligible effect globally but a huge impact domestically due to its large slice of the U.K. mortgage business.”

Wide Range

The D-SIB rules could potentially apply to a wide range of lenders, including both stand-alone banks that dominate national markets and locally important subsidiaries of international financial companies, the Basel committee said.

Regulators should ensure that banks that are equally systemic face similar surcharges, so preventing discrimination, the group said. The committee plans to probe how regulators set the capital rules to make sure there is also international consistency.

One potential risk of the D-SIB initiative is that it could lock more capital in a bank’s individual subsidiaries, meaning it wouldn’t be available to bolster other parts of the lender in times of crisis, Anders Kvist, head of group financial management at Sweden’s SEB AB bank, said in a June 27 interview.

“It is better for overall stability if capital cushions are held at the center of a group ready to be deployed where capital is required in stress,” he said.

Under the Basel plan, local regulators would be free to impose higher reserve requirements on subsidiaries of globally systemic banks.

In such cases, “it is important that the home authority continues to ensure there are sufficient financial resources at the parent level, for example through a solo capital requirement,” the group said.

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

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


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