Global bank regulators are committed to reaching a deal on a capital surcharge for big banks next week, the secretary-general of the Basel committee said on September 22. Banks have protested that forcing big lenders to hold larger capital buffers will put them at a disadvantage. JP Morgan Chase & Co's chief executive, Jamie Dimon, dubbed the proposed rules "anti-American."
Stefan Walter, whose Basel Committee on Banking Supervision is charged with the fine print of bank regulation, said the body was aware of industry concerns and sought to be balanced and fair to all jurisdictions.
Regulators are due to meet next week to agree on plans to make big banks hold up to 2.5 percent extra capital, a move regulators say will reduce the risk of them failing. A final decision will be made by Group of 20 leaders in November. "There is a very strong commitment to produce a strong framework in time for the G20 leaders' summit," Walter said in a telephone interview from Basel when asked about the committee meeting on September 28 and 29.
"The capital surcharge is not one size fits all," he said. "It is a framework that will be based on a clearly defined and transparent set of measures that determine which institutions are globally systemic banks, and if they meet that designation, what their capital surcharge should be." Basel III rules will require banks to maintain top-quality capital equal to 7 percent of their risk-bearing assets. On top of that, global "systemic" banks may have to hold up to an additional 2.5 percent buffer. Another 1 percent would be imposed if a bank became significantly bigger.
The list of systemically important banks is expected to include 28 globally active banks, which would be subject not only to the surcharge but also extra regulatory scrutiny. Walter said he saw no problem with Latin American banks complying with the new rules, due to be phased in from 2013.
"Compared to other banks globally, Latin American banks are very well capitalised and therefore in a good position to meet the Basel III standards within the deadlines, probably even faster than the 2019 timeframe that's given," he said. Banks are also pushing to change a liquidity rule that will force them to hold enough cash-like, top-quality instruments to withstand a month of severe outflows.
Walter said consultations were ongoing with the aim of producing "a sound, prudent, conservative standard, but one which doesn't inappropriately destroy legitimate business models". There might be some leeway for banks in countries where a limited supply of government bonds may make it difficult for banks to comply with the liquidity rule, such as Australia, Singapore, Hong Kong and Denmark.
"We are talking about a very small set of countries," Walter said. "The key challenge we are working on now is to come up with an objective threshold to distinguish between those countries that really don't have enough assets to meet the standard and countries that clearly do."
Alternative approaches might be to allow some banks to use more second-rung assets as a substitute, subject to higher haircuts; use of foreign-currency denominated debt instead of just local debt; and establishment of a liquidity facility with the country's central bank. The Reserve Bank of Australia is set to provide an added liquidity facility to help Australian banks meet the new Basel standards.