Regulators Slap Big Banks With New Basel Surcharges

Citigroup (NYSE:C), JPMorgan (NYSE:JPM), BNP Paribas, Royal Bank of Scotland (NYSE:RBS), and HSBC Holdings (NYSE:HBC) could be facing capital surcharges of 2.5 percentage points on top of Basel III capital requirements. Bank of America (NYSE:BAC), Barclays (NYSE:BCS), and Deutsche Bank (NYSE:DB) may face surcharges of 2 percentage points, according to a provisional list prepared by global regulators.

Hot Feature: EU Prepares to Launch New Rescue Fund Next Month

The list was drawn up as part of plans by Group of 20 nations to force banks whose failure could threaten the global economy to boost their capital reserves by 1 to 2.5 percentage points above the minimum levels agreed on by international regulators. A simplified version of the list, which did include the surcharges that individual banks would face, was published by the Financial Stability Board on November 4.

Though plans for the surcharges were published only after G-20 leaders approved them last week, regulators have emphasized that the current list is only provisional and will be repeatedly revised before the surcharges are applied, starting in 2016. The list is based on data from the end of 2009. Lenders have already been asked to submit data from the end of 2010 so that an updated list can be published next year.

While some of the surcharges might be “less meaningful, as they will be trumped by local regulation in Europe, especially in countries with supersized banking systems,” according to Morgan Stanley (NYSE:MS) analysts, some lenders have warned regulators the plans could cause them to cut lending and support to international trade.

“You’re saying by virtue of being a bigger bank, you’re going to have to pay for that,” said Joseph R. Mason, a finance professor at Louisiana State University in Baton Rouge. “You’re creating an incentive for big banks to hide even more risk to get the surcharge reduced.” Extra requirements are calculated based on banks’ interconnectedness, size, complexity, global reach, and the ability of other firms to take over their functions should they fail.

The plans do allow national regulators to adjust surcharges at their own discretion, either moving banks up or down the list if they can show the Basel committee’s calculations should be overridden. The reason for Deutsche Bank, Germany’s biggest bank, being placed outside the top tier is likely the result of “supervisory judgment” on behalf of German authorities, said Richard Reid, research director for the International Centre for Financial Regulation.

Reid also acknowledged that there may be a “political element to the process of drawing up the lists,” with rankings likely to change “as more up to date information is incorporated and supervisors amend their recommendations in the light of changing economic and financial conditions.”

The current list has Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Bank of New York Mellon (NYSE:BK), Credit Agricole, Credit Suisse (NYSE:CS), and UBS AG (NYSE:UBS) facing surcharges of 1.5 percentage points. Wells Fargo (NYSE:WFC), Societe Generale, and Dexia SA, along with the remaining 15 banks on the list, are looking at surcharges of 1 percentage point.

Don’t Miss: The Euro Mess Brings Out the Best in Gold

The surcharges will be applied on top new Basel III capital requirements agreed upon last year by international regulators. The Basel III requirements will more than triple the core reserves that lenders must hold, while the additional buffers mean lenders may face core capital requirements of as much as 9.5% of assets. The top capital tier under Basel III is 7%.