World’s Largest Banks Told to Hold More Capital
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In light of recent rogue trading and rate-rigging scandals, banks will be required to hold extra capital reserves to protect the financial system, as well as taxpayers, against unforeseeable operational risks, said global regulators.
A statement released by the Financial Stability Board, a body that coordinates international bank regulations, yesterday said banks that are deemed too-big-to-fail should hold more capital reserves to absorb any potential losses.
The FSB said:
In light of recent rogue trading and rate-rigging scandals, banks will be required to hold extra capital reserves to protect the financial system, as well as taxpayers, against unforeseeable operational risks, said global regulators.
A statement released by the Financial Stability Board, a body that coordinates international bank regulations, yesterday said banks that are deemed too-big-to-fail should hold more capital reserves to absorb any potential losses.
The FSB said:
[quote] The recent spate of high-profile, and potentially solvency-threatening, operational risk events and failures have added urgency to fundamentally reviewing these capital approaches. [/quote]
The FSB had in 2011 published an initial list of 29 so-called systemically important banks but Thursday’s statement was the first time that it assigned specific capital buffers to each bank.
The capital surcharges for systemic banks come on top of recommendations by the Basel committee to more than triple the core reserves that lenders have to hold against possible losses. Once the so-called Basel III rules, designed to prevent another taxpayer bailout, are fully in place by 2019, and nearly all banks will have to hold capital that is at least 7 percent of their assets.
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However, systemically more important banks will have to have even more capital: Citigroup, Deutsche Bank, HSBC and JPMorgan will have to hold additional capital that is equivalent to 2.5 percent of their risk-adjusted assets, taking them to an overall requirement of 9.5 percent, the highest for all banks.
No bank was in the 3.5 percent range, which is considered a stick to stop banks from growing any bigger. The lower range capital surcharge is 1 percent.
The FSB’s requirements will come into effect in 2016 and will be revised twice more before then.
Citigroup spokeswoman Shannon Bell said the bank’s estimated Tier 1 common capital ratio of 8.6 percent under Basel III at the end of the third quarter was among the highest in the industry. The bank expects to continue to generate capital through earnings and the divestiture of non-core assets, she told Reuters.
JPMorgan declined to comment while Deutsche Bank and HSBC could not be immediately reached.
The instruction from the FSB comes as G20 finance ministers prepare to meet in Mexico this weekend when governments will review progress in implementing a welter of pledges to reform finance after the 2007-2009 financial crisis.
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