Bloomberg News

FSB Extends Too-Big-to-Fail to National Banks, Insurers

October 11, 2012

International regulators backed tougher rules for banks whose collapse might roil national economies and for globally systemic insurers as they agreed to bolster defenses against too-big-to-fail financial institutions.

Authorities are committed to boosting the “intensity and effectiveness” of how systemic institutions are supervised, the Financial Stability Board said after a meeting today in Tokyo. Global efforts to prevent any repeat of the scandal engulfing Libor and other interbank lending rates should be coordinated, the FSB said.

The financial system is afflicted by “vulnerabilities,” the group said. Progress is needed in “authorities’ ongoing work to strengthen global financial regulation.”

The FSB is extending its push against companies deemed too big to fail beyond last year’s decision to list 29 so-called globally systemic banks that should hold more capital. Citigroup Inc. (C:US), JPMorgan Chase & Co. (JPM:US), BNP Paribas SA (BNP), Royal Bank of Scotland Group Plc (RBS), and HSBC Holdings Plc (HSBA) were provisionally earmarked to face the top level of capital surcharges, set at 2.5 percent of risk-weighted assets.

An updated version of that list was discussed by the FSB and will be published in November, Mark Carney, the board’s chairman, told reporters after today’s meeting. The revised document is based on end-2011 data, the FSB said.

Updated List

One bank almost certain to drop off the updated list is Dexia SA (DEXB), the Franco-Belgian lender that is being broken up after losing access to unsecured funding, Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels, said last week.

The FSB-endorsed rules for nationally systemic banks were published by the Basel Committee on Banking Supervision today. The measures call for capital surcharges while leaving it up to local regulators to set their precise level.

National regulators should even be allowed to impose extra capital rules on subsidiaries of global banks if they play an important role in that national market, the Basel group said in a statement.

“The impact of the failure of a domestic systemically important bank could be significantly greater than that of a non-systemic institution,” Stefan Ingves, chairman of the Basel committee, said in its statement.

Interbank Lending

On Libor, the FSB said today it would act as “coordinator” of national and international work to review interbank lending rates. The group is also weighing the need for global principles on how these rates and other so-called market benchmarks are set.

Confidence in Libor, the benchmark interest rate for more than $360 trillion of securities, was shaken following Barclays Plc’s (BARC) admission in June that it submitted false rates. The revelations provoked renewed calls for tougher oversight of the financial system and pushed regulatory and criminal probes of Libor and other interbank lending rates, such as Euribor, to the top of the political agenda.

The FSB also set deadlines for other work. The board plans to publish draft rules for so-called shadow banks, as well as steps to reduce regulators’ reliance on credit-ratings companies, following a meeting of Group of 20 finance ministers in November.

‘Conflicts, Inconsistencies’

Separately, the FSB said it was concerned about unresolved “conflicts, inconsistencies and gaps” in rules nations have put in place to regulate over-the-counter derivatives.

Michel Barnier, the European Union’s financial services chief, earlier this year urged the U.S. to delay enforcing OTC derivatives rules on EU banks amid concerns that the measures were unclear and may create unnecessary costs.

The FSB also reviewed how far banks have retreated from overseas business in response to the financial crises that have rocked the global economy since 2008.

“While there is evidence that some banks are withdrawing from international activity, this trend is so far mainly limited to the euro area,” the FSB said.

“Part of this retrenchment reflects a normalization process after a period in which international activities by banks became overextended in the previous decade,” it said.

The group also called on the euro area to press ahead with measures to boost confidence in its banks.

“There are signs that reforms in peripheral euro-zone countries are beginning to bear fruit,” the board said.

“It is important that this momentum is not lost and that trust in the health of some financial institutions is fully restored,” it said. “Financial repair should proceed expeditiously, as delays would increase the capital need.”

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net; Gonzalo Vina in Tokyo at gvina@bloomberg.net

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


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