The Financial Stability Board spelled out for the first time
Thursday the amount of extra capital it would expect the world's
largest banks to hold in respect of the potential risk they pose to
the global financial system by their size and scale.
The FSB, which coordinates the global regulatory response to the
financial crisis on behalf of the Group of 20 leading advanced and
emerging economies, identified Citigroup Inc. (C), HSBC Holdings
PLC (HBC, 0005.HK), Deutsche Bank AG (DBK.XE, DB) and J.P. Morgan
Chase & Co. (JPM) as the four banks most central to the system,
on the basis of their 2011 data.
It said the banks should be subject to a capital surcharge of
2.5 percentage points over and above the statutory minimums laid
out in the so-called Basel III accords on bank capital. It said 24
other banks on its list should be subjected to smaller surcharges
of between 1% and 2%. Basel III requires banks to hold capital
equivalent to at least 7% of their risk-weighted assets to operate
freely.
The FSB's estimate isn't binding, yet. It will only draw up a
definitive list of "global systemically important financial
institutions," or G-SIFIs, in 2014, and the capital charges will be
phased in between 2016 and the start of 2019, in parallel with
Basel III.
Regulators have attached particular importance to such
"systemically important financial institutions," or SIFIs, their
phrase for the banks that are labeled as "Too Big To Fail." The
extra capital requirements are aimed at reducing the risk of one of
them failing and causing massive worldwide disruption in the manner
of investment bank Lehman Brothers Inc in 2008.
In updating its list, the FSB made only two changes to the
original list it drew up last year, dropping Germany's Commerzbank
AG (CBK.XE) and Franco-Belgian lender Dexia SA (DEXB.BT). Dexia had
collapsed at the end of 2011, requiring the kind of multi-billion
taxpayer-funded rescue that the new surcharges are aimed at
avoiding.
The updated list was part of three separate progress reports
that the FSB prepared for a meeting of G-20 finance ministers and
central bank governors in Mexico City this weekend.
In its reports, the FSB sharply criticized the SIFIs for the
lack of progress made in reducing the risks they pose to the world.
Last year, it had instructed its initial list of G-SIFIs to draw up
by the end of 2012 Recovery and Resolution Plans, also known as
RRPs or "living wills", that would enable supervisors to wind them
down in an orderly fashion if they fail.
By its own carefully-worded standards, it was scathing of the
banks' first drafts, accusing them of being blase about the losses
they could incur, and about the legal difficulties of resolving a
cross-border failure.
The FSB said its reviews, which are still in progress, "have
highlighted a need for greater severity in the hypothetical stress
scenarios and for a more exhaustive analysis with regard to
impediments to the implementation of recovery measures, taking into
account interconnections between group entities and constraints
arising from the legal framework."
It said key supervisory committees will launch a review in 2013
of each SIFI resolution plan to check that it can be practically
put into operation. The FSB's reports appeared to draw heavily on
recent financial incidents such as the disastrous "London Whale"
hedging operation that cost J.P. Morgan over $6 billion, and the
collapse of investment firm MF Global, which was followed by a
storm of allegations that client funds had been misappropriated as
management vainly tried to stave off disaster.
The FSB said that the MF Global case "and other external events"
had underlined the need for "clear, transparent and enforceable
arrangements" to protect client assets, and it voiced concern at
how far authorities are from being able to guarantee this
today.
"Greater understanding is needed of how those objectives can be
achieved in the case of financial firms with significant holdings
of client assets, and particularly where those assets are held in
different jurisdictions," the report said.
In general, the FSB's urged overseers to be more pro-active and
intrusive in their supervision of G-SIFIs, telling them to pay more
attention to banks' succession planning and to the performance
expectations that they set for key management figures.
It also said supervisors should be in more frequent and
intensive contact with SIFIs' boards and more "dynamic" in
assessing the general risk culture within institutions.
Write to Geoffrey T. Smith at geoffrey.smith@dowjones.com
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