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International regulators are set to rebuff heavy lobbying by banks and stick with a plan to require some of the world's largest financial institutions to hold extra capital, according to people familiar with the matter.
The watchdogs that make up the Basel Committee on Banking Supervision are gathering Tuesday in the Swiss city to consider comments on a planned rule requiring big banks to maintain thicker capital cushions than other institutions. The proposal, first put out in July, aims to curb risk-taking and ensure that these banks are able to absorb sudden losses without damaging the broader financial system or requiring taxpayer bailouts.
The July agreement would require 28 big banks to hold between 1% and 2.5% of extra capital as a percentage of their "risk-weighted assets." The surcharge comes on top of a base 7% capital requirement for all banks agreed to by international regulators last year.
The surcharge would require U.S. banks, collectively, to raise an additional $200 billion in common equity above the general increased requirements of the committee's so-called Basel III agreement, according to a study by the Clearing House, a large U.S. bank trade group. The group commissioned the study as part of its effort to persuade regulators that the surcharge is unnecessary and could damage the industry.
The biggest U.S. banks, such as J.P. Morgan Chase & Co., Citigroup Inc., have spent months lobbying U.S. policy makers to make significant changes to the capital surcharge proposal or scrap it altogether. They argue the extra surcharge heaped atop already-enhanced capital standards is unnecessary and will hurt the economic recovery.
But regulators in the U.S. and abroad don't appear to be buying the arguments.
Several government officials defended the capital surcharge as they attended meetings in Washington last week. Their public comments support the view, voiced by people familiar with the matter, that the fundamental aspects of the surcharge proposal won't change and that international regulators will likely finalize it by the end of the year.
William Dudley, president of the Federal Reserve Bank of New York, in a speech Friday, stood by the imposition of surcharges on large global banks, many of which are from the U.S. "The logic behind the SIFI surcharge is that the failure of a systemically important institution would generate a very large shock to the rest of the financial system," he said. "As a consequence, it makes sense to require higher capital for such firms to reduce their probability of failure."
Tensions between banks and regulators on the issue flared last weekend when J.P. Morgan Chief Executive James Dimon delivered a vigorous critique of the surcharge to Bank of Canada governor Mark Carney, who was visibly irritated by the incident, according to people familiar with the exchange. The incident happened during a Friday meeting at the National Archives organized by the Financial Services Forum, a trade group, attended by the heads of about 30 major U.S. financial institutions and government finance officials.
The Forum declined to comment. A spokesman for the Bank of Canada confirmed that Mr. Carney was at the meeting. J.P. Morgan declined to comment on the record. Two days later, Mr. Carney directly challenged the banks' argument that the new requirements would substantially reduce global economic growth in a speech. In a speech Sunday to the Institute of International Finance, an association of financial institutions, he said the plan for broad financial system changes embraced by the Group of 20 nations, "seeks to boost confidence in global financial institutions and markets by providing a path to a more resilient system and an end to government support. It is hard to see how backsliding would help."
READ MORE New Capital Rules Likely for Banks - WSJ.com
The watchdogs that make up the Basel Committee on Banking Supervision are gathering Tuesday in the Swiss city to consider comments on a planned rule requiring big banks to maintain thicker capital cushions than other institutions. The proposal, first put out in July, aims to curb risk-taking and ensure that these banks are able to absorb sudden losses without damaging the broader financial system or requiring taxpayer bailouts.
The July agreement would require 28 big banks to hold between 1% and 2.5% of extra capital as a percentage of their "risk-weighted assets." The surcharge comes on top of a base 7% capital requirement for all banks agreed to by international regulators last year.
The surcharge would require U.S. banks, collectively, to raise an additional $200 billion in common equity above the general increased requirements of the committee's so-called Basel III agreement, according to a study by the Clearing House, a large U.S. bank trade group. The group commissioned the study as part of its effort to persuade regulators that the surcharge is unnecessary and could damage the industry.
The biggest U.S. banks, such as J.P. Morgan Chase & Co., Citigroup Inc., have spent months lobbying U.S. policy makers to make significant changes to the capital surcharge proposal or scrap it altogether. They argue the extra surcharge heaped atop already-enhanced capital standards is unnecessary and will hurt the economic recovery.
But regulators in the U.S. and abroad don't appear to be buying the arguments.
Several government officials defended the capital surcharge as they attended meetings in Washington last week. Their public comments support the view, voiced by people familiar with the matter, that the fundamental aspects of the surcharge proposal won't change and that international regulators will likely finalize it by the end of the year.
William Dudley, president of the Federal Reserve Bank of New York, in a speech Friday, stood by the imposition of surcharges on large global banks, many of which are from the U.S. "The logic behind the SIFI surcharge is that the failure of a systemically important institution would generate a very large shock to the rest of the financial system," he said. "As a consequence, it makes sense to require higher capital for such firms to reduce their probability of failure."
Tensions between banks and regulators on the issue flared last weekend when J.P. Morgan Chief Executive James Dimon delivered a vigorous critique of the surcharge to Bank of Canada governor Mark Carney, who was visibly irritated by the incident, according to people familiar with the exchange. The incident happened during a Friday meeting at the National Archives organized by the Financial Services Forum, a trade group, attended by the heads of about 30 major U.S. financial institutions and government finance officials.
The Forum declined to comment. A spokesman for the Bank of Canada confirmed that Mr. Carney was at the meeting. J.P. Morgan declined to comment on the record. Two days later, Mr. Carney directly challenged the banks' argument that the new requirements would substantially reduce global economic growth in a speech. In a speech Sunday to the Institute of International Finance, an association of financial institutions, he said the plan for broad financial system changes embraced by the Group of 20 nations, "seeks to boost confidence in global financial institutions and markets by providing a path to a more resilient system and an end to government support. It is hard to see how backsliding would help."
READ MORE New Capital Rules Likely for Banks - WSJ.com
