Bankers agree on capital surcharge

LONDON: Global banking regulators have agreed on a proposal to slap an extra capital charge on the world's biggest banks to make them safer by 2019.

The Group of Governors and Heads of Supervision (GHOS) said after a meeting in Basel on Saturday the proposal would be put out to public consultation next month.

"The additional loss absorbency requirements are to be met with progressive common equity tier 1 capital requirement ranging from 1 percent to 2.5 percent, depending on a bank's systemic importance," the group said in a statement.

An additional 1 percent surcharge would also be imposed if a bank becomes significantly bigger.

The plans needs approval from world leaders (G20) in November, would be phased in between Jan. 1 2016 and end of 2018.

The capital surcharge will come on top of the new 7 percent minimum core capital all banks across the world will have to hold under new Basel III rules being phased in from 2013.

It appears the central bankers have opted for a smaller surcharge than foreseen but, in return, the surcharge will have to be in the form of top quality capital, such as retained earnings or common equity.

Banks were hoping they could use hybrid debt such as contingent capital to pad out the surcharge band.

The proposal, which was due to be finalised by last November but faced opposition from banks and some countries, will apply initially to so-called globally systemically important banks (G-SIBs).

"These measures will strengthen the resilience of G-SIBs and create strong incentives for them to reduce their systemic importance over time," the statement said.

There was no indication how many banks will be included.

Banks will face a surcharge according to an indicator that draws on five elements size, interconnectedness, and lack of substitutability, global (cross-jurisdictional) activity, and complexity.

The group of central bankers and the Basel Committee it oversees said they will continue to review the use of contingent capital.

The central bankers said they would support the use of contingent capital to meet higher national requirements than the global minimum.

However, even then, there would have to be a high-trigger for converting the debt into equity to help absorb losses on a going concern basis, the central bankers said.

Copyright Reuters, 2011