June 7 (Bloomberg) -- The Federal Reserve supports a
proposal at the Basel Committee on Banking Supervision that
calls for a maximum capital surcharge of 3 percentage points on
the largest global banks, according to a person familiar with
the discussions.
International central bankers and supervisors meeting in
Basel, Switzerland, have decided that banks need to hold more
capital to avoid future taxpayer-funded bailouts. Financial
stock indexes fell in Europe and the U.S. yesterday as traders
interpreted June 3 remarks by Fed Governor Daniel Tarullo as
leaving the door open to surcharges of as much as 7 percentage
points.
“A 7 percentage-point surcharge for the largest banks
would be a disaster,” said Jason Goldberg, senior analyst at
Barclays Capital Inc. in New York. “It will certainly restrict
lending and curb economic growth if true.”
Basel regulators agreed last year to raise the minimum
common equity requirement for banks to 4.5 percent from 2
percent, with an added buffer of 2.5 percent for a total of 7
percent of assets weighted for risk.
Basel members are also proposing that so-called global
systemically important financial institutions, or global SIFIs,
hold an additional capital buffer equivalent to as much as 3
percentage points, a stance Fed officials haven’t opposed, the
person said.
Bank Indexes Fall
The Bloomberg Europe Banks and Financial Services Index
fell 1.45 percent yesterday, while the Standard & Poor’s 500
Index declined 1.1 percent. The KBW Bank Index, which tracks
shares of Citigroup Inc., Bank of America Corp., Wells Fargo &
Co. and 21 other companies, fell 2.1 percent.
In a June 3 speech, Tarullo presented a theoretical
calculation with the global SIFI buffer as high as 7 percentage
points.
“The enhanced capital requirement implied by this
methodology can range between about 20% to more than 100% over
the Basel III requirements, depending on choices made among
plausible assumptions,” he said in the text of his remarks at
the Peter G. Peterson Institute for International Economics in
Washington.
In a question-and-answer period with C. Fred Bergsten, the
Peterson Institute’s director, Tarullo agreed that the capital
requirement, with the global SIFI buffer, could be 8.5 percent
to 14 percent under this scenario. A common equity requirement
of 10 percent is closer to what investors are assuming.
‘Across the Board’
“I think 3 percent is where everyone expected it to come
out,” Simon Gleeson, a financial services lawyer at Clifford
Chance LLP in London, said in a telephone interview. “If it is
3 percent across the board then it will be interesting to see
what happens to the smallest SIFI and the largest non-SIFI” on
a competitive basis, he said.
U.S. Treasury Secretary Timothy F. Geithner, in remarks
yesterday before the International Monetary Conference in
Atlanta, said there is a “strong case” for a surcharge on the
largest banks. Fed Chairman Ben S. Bernanke is scheduled to
discuss the U.S. economic outlook at the conference today.
“In the United States, we will require the largest U.S.
firms to hold an additional surcharge of common equity,”
Geithner said. “We believe that a simple common equity
surcharge should be applied internationally.”
Distort Markets
Financial industry executives are concerned that rising
capital requirements will hurt the U.S. economy, which is
already struggling with an unemployment rate stuck at around 9
percent.
Higher capital charges “will have ramifications on what
people pay for credit, what banks hold on balance sheets,”
JPMorgan Chase & Co. chairman and chief executive officer Jamie
Dimon told investors at a June 2 Sanford C. Bernstein & Co.
conference in New York.
The Global Financial Markets Association, a trade group
whose board includes executives from Goldman Sachs Group Inc.
and Morgan Stanley, said the surcharge may apply to 15 to 26
global banks, according to a May 25 memo sent to board members
by chief executive officer Tim Ryan.
Dino Kos, managing director at New York research firm
Hamiltonian Associates, said the discussion about new capital
requirements comes at a time when banks face stiff headwinds.
Credit demand is weak, and non-interest income from fees and
trading is also under pressure.
Best Result
U.S. banks reported net income of $29 billion in the first
quarter, the best result since the second quarter of 2007,
before subprime mortgage defaults began to spread through the
global financial system, according to the Federal Deposit
Insurance Corp.’s Quarterly Banking Profile.
Still, the higher profits resulted from lower loan-loss
provisions, the FDIC said. Net operating revenue fell 3.2
percent from a year earlier, only the second time in 27 years of
data the industry reported a year-over-year decline in quarterly
net operating revenue, the FDIC said.
“You can see why banks are howling,” said Kos, former
executive vice president at the New York Fed. Higher capital
charges come on top of proposals to tighten liquidity rules and
limit interchange fees, while the “Volcker Rule” restricts
trading activities. Taken together these imply lower returns on
equity, he said.
“How can you justify current compensation levels if returns
on equity are much lower than in the past?” Kos said
proposal at the Basel Committee on Banking Supervision that
calls for a maximum capital surcharge of 3 percentage points on
the largest global banks, according to a person familiar with
the discussions.
International central bankers and supervisors meeting in
Basel, Switzerland, have decided that banks need to hold more
capital to avoid future taxpayer-funded bailouts. Financial
stock indexes fell in Europe and the U.S. yesterday as traders
interpreted June 3 remarks by Fed Governor Daniel Tarullo as
leaving the door open to surcharges of as much as 7 percentage
points.
“A 7 percentage-point surcharge for the largest banks
would be a disaster,” said Jason Goldberg, senior analyst at
Barclays Capital Inc. in New York. “It will certainly restrict
lending and curb economic growth if true.”
Basel regulators agreed last year to raise the minimum
common equity requirement for banks to 4.5 percent from 2
percent, with an added buffer of 2.5 percent for a total of 7
percent of assets weighted for risk.
Basel members are also proposing that so-called global
systemically important financial institutions, or global SIFIs,
hold an additional capital buffer equivalent to as much as 3
percentage points, a stance Fed officials haven’t opposed, the
person said.
Bank Indexes Fall
The Bloomberg Europe Banks and Financial Services Index
fell 1.45 percent yesterday, while the Standard & Poor’s 500
Index declined 1.1 percent. The KBW Bank Index, which tracks
shares of Citigroup Inc., Bank of America Corp., Wells Fargo &
Co. and 21 other companies, fell 2.1 percent.
In a June 3 speech, Tarullo presented a theoretical
calculation with the global SIFI buffer as high as 7 percentage
points.
“The enhanced capital requirement implied by this
methodology can range between about 20% to more than 100% over
the Basel III requirements, depending on choices made among
plausible assumptions,” he said in the text of his remarks at
the Peter G. Peterson Institute for International Economics in
Washington.
In a question-and-answer period with C. Fred Bergsten, the
Peterson Institute’s director, Tarullo agreed that the capital
requirement, with the global SIFI buffer, could be 8.5 percent
to 14 percent under this scenario. A common equity requirement
of 10 percent is closer to what investors are assuming.
‘Across the Board’
“I think 3 percent is where everyone expected it to come
out,” Simon Gleeson, a financial services lawyer at Clifford
Chance LLP in London, said in a telephone interview. “If it is
3 percent across the board then it will be interesting to see
what happens to the smallest SIFI and the largest non-SIFI” on
a competitive basis, he said.
U.S. Treasury Secretary Timothy F. Geithner, in remarks
yesterday before the International Monetary Conference in
Atlanta, said there is a “strong case” for a surcharge on the
largest banks. Fed Chairman Ben S. Bernanke is scheduled to
discuss the U.S. economic outlook at the conference today.
“In the United States, we will require the largest U.S.
firms to hold an additional surcharge of common equity,”
Geithner said. “We believe that a simple common equity
surcharge should be applied internationally.”
Distort Markets
Financial industry executives are concerned that rising
capital requirements will hurt the U.S. economy, which is
already struggling with an unemployment rate stuck at around 9
percent.
Higher capital charges “will have ramifications on what
people pay for credit, what banks hold on balance sheets,”
JPMorgan Chase & Co. chairman and chief executive officer Jamie
Dimon told investors at a June 2 Sanford C. Bernstein & Co.
conference in New York.
The Global Financial Markets Association, a trade group
whose board includes executives from Goldman Sachs Group Inc.
and Morgan Stanley, said the surcharge may apply to 15 to 26
global banks, according to a May 25 memo sent to board members
by chief executive officer Tim Ryan.
Dino Kos, managing director at New York research firm
Hamiltonian Associates, said the discussion about new capital
requirements comes at a time when banks face stiff headwinds.
Credit demand is weak, and non-interest income from fees and
trading is also under pressure.
Best Result
U.S. banks reported net income of $29 billion in the first
quarter, the best result since the second quarter of 2007,
before subprime mortgage defaults began to spread through the
global financial system, according to the Federal Deposit
Insurance Corp.’s Quarterly Banking Profile.
Still, the higher profits resulted from lower loan-loss
provisions, the FDIC said. Net operating revenue fell 3.2
percent from a year earlier, only the second time in 27 years of
data the industry reported a year-over-year decline in quarterly
net operating revenue, the FDIC said.
“You can see why banks are howling,” said Kos, former
executive vice president at the New York Fed. Higher capital
charges come on top of proposals to tighten liquidity rules and
limit interchange fees, while the “Volcker Rule” restricts
trading activities. Taken together these imply lower returns on
equity, he said.
“How can you justify current compensation levels if returns
on equity are much lower than in the past?” Kos said
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