Financial Controls: Higher Capital Requirements Approved for World's Largest Banks (Review) *Safety buffer for Too Big To Fail*

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Globally systemically important banks (G-SIBs) will have higher capital requirements to strengthen resilience

The Group of Governors and Heads of Supervision (GHOS), the oversight group for the Basel Committee on Banking Supervision (BCBS), has agreed to raise the capital requirements of globally systemically important banks (G-SIBs) to increase resilience and reduce the risk of failure of these "Too Big To Fail" financial institutions. The official statement is lower in this post.

Banks Reach Deal on Capital Buffer

The world's largest banks that can pose the biggest risks to the global financial system will have to hold up to an additional 2.5% of capital on their balance sheets to protect them in event of another crisis, the group of central-bank heads leading the Basel discussions agreed on Saturday.

The extra capital buffer defined in its strictest terms detailed Saturday by the committee brings some clarity to a much-discussed section of global financial reforms. Several global leaders and bankers have sparred over how much capital is necessary for the banks to hold to ensure a crisis like 2008 is not repeated.

The Bank of International Settlements, or BIS, which released the details Saturday, acts an umbrella organization for the world's central banks and is largely leading the initiative on higher bank capital standards through the Basel Committee on Banking Supervision.

The consultative document, agreed to by the group of governors and heads of supervision, will be presented to the Financial Stability Board, which is expected to issue the final rules next month.

Jean-Claude Trichet, president of the European Central Bank and chairman of the group, welcomed the news in a release, saying "the agreements reached today will help address the negative externalities and moral hazard posed by global systemically important banks."

The agreement calls for banks that can pose risks to the global financial system to face a rising scale for the requirement. Depending on their importance, the banks required capital buffer will be between 1% and 2.5% in Tier 1 common equity, the strictest definition of capital. That buffer would come on top of the 7% Tier 1 common equity that the Basel III committee already determined all financial institutions should hold.

The committee's statement also said "to provide a disincentive for banks facing the highest charge to increase materially their global systemic importance in the future, an additional 1% surcharge would be applied in such circumstances. " The assessment methodology would be based size, interconnectedness, lack of substitutability, global activity and complexity of the banks. The banks would have until 2019 to hit the higher levels of capital.

Banks Reach Deal on Capital Buffer - WSJ.com

Trichet Praises New Capital Requirements: After Criticism from U.S., Oversight Body Moves to Reduce Risk

NEW YORK (MarketWatch) -- The Group of Governors and Heads of Supervision, an oversight body for world banking, on Saturday said it raised capital requirements for loss absorbancy to as much as 3.5% in a move hailed as a step toward reducing hazards faced by major international lenders.

Jean-Claude Trichet, president of the European Central Bank and chairman of the Group of Governors and Heads of Supervision, said the agreement would “help address the negative externalities and moral hazard posed by global systemically important banks.”

The banking group, which serves as the oversight body of the Basel Committee on Banking Supervision, agreed on additional loss absorbency requirements ranging from 1% to 2.5% of capital. An additional 1% surcharge could be applied as a “disincentive” for banks facing the highest charge to increase risk levels.

The intergovernmental organization charged with setting capital standards passed the new requirements as monetary leaders faced divisions within Europe and the U.S. on how high capital requirements should be to protect against bank failure on an worldwide scale.

Nout Wellink, chairman of the Basel Committee on Banking Supervision and president of the Netherlands Bank, said the measures will “enhance the resiliency of the banking system and help mitigate the wider spill-over risks of global systemically important banks.”

The new surcharge comes along with a new Basel III requirement that global banks hold top-quality capital totaling 7% of their risk-bearing assets.

U.S. bank regulators have complained about lack of constraint among European financial institutions, which have been setting their own capital requirements. “Just as troubling is that European banks continue to effectively set their own capital requirements using internal risk estimates, unconstrained by any objective hard limits,” said Federal Deposit Insurance Corp. Chairman Sheila Bair said earlier this month.

The Bank for International Settlements describes itself as international organization for monetary policy cooperation; it also serves as a bank for central banks. Member countries include the U.S.

Now that the Group of Governors and Heads of Supervision approved the new requirements, the body will submit the document to the Financial Stability Board, which is coordinating the overall set of measures on capital requirements.

The group laid out the assessment methodology for globally significant banks based on size, interconnectedness, lack of substitutability, global cross-jurisdictional activity and complexity. The higher loss absorbency requirements will be introduced between 2016 and 2018, and will become fully effective in 2019.

Trichet praises new capital requirements - MarketWatch

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The Group of Central Bank Governors and Heads of Supervision Official Statement (June 25, 2011): Measures for global systemically important banks agreed by the Group of Governors and Heads of Supervision

At its 25 June 2011 meeting, the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision (BCBS), agreed on a consultative document setting out measures for global systemically important banks (G-SIBs). These measures include the methodology for assessing systemic importance, the additional required capital and the arrangements by which they will be phased in. These measures will strengthen the resilience of G-SIBs and create strong incentives for them to reduce their systemic importance over time.

The GHOS is submitting this consultative document to the Financial Stability Board (FSB), which is coordinating the overall set of measures to reduce the moral hazard posed by global systemically important financial institutions. This package of measures will be issued for consultation around the end of July 2011.

The assessment methodology for G-SIBs is based on an indicator-based approach and comprises five broad categories: size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity and complexity.

The additional loss absorbency requirements are to be met with a progressive Common Equity Tier 1 (CET1) capital requirement ranging from 1% to 2.5%, depending on a bank's systemic importance. To provide a disincentive for banks facing the highest charge to increase materially their global systemic importance in the future, an additional 1% surcharge would be applied in such circumstances.

The higher loss absorbency requirements will be introduced in parallel with the Basel III capital conservation and countercyclical buffers, ie between 1 January 2016 and year end 2018 becoming fully effective on 1 January 2019.

The GHOS and BCBS will continue to review contingent capital, and support the use of contingent capital to meet higher national loss absorbency requirements than the global minimum, as high-trigger contingent capital could help absorb losses on a going concern basis.

Mr Jean-Claude Trichet, President of the European Central Bank and Chairman of the Group of Governors and Heads of Supervision, said that "the agreements reached today will help address the negative externalities and moral hazard posed by global systemically important banks." Mr Nout Wellink, Chairman of the Basel Committee on Banking Supervision and President of the Netherlands Bank, added that "the proposed measures will increase the going-concern loss absorbency of G-SIBs. This will contribute to enhancing the resiliency of the banking system and help mitigate the wider spill-over risks of global systemically important banks".

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