Central bankers agree on bank capital surcharge plan

BASEL, Switzerland/LONDON Sat Jun 25, 2011 1:53pm EDT

A woman carries an umbrella during a rain shower as she walks past the Bank of England in London November 30, 2009. REUTERS/Andrew Winning

A woman carries an umbrella during a rain shower as she walks past the Bank of England in London November 30, 2009.

Credit: Reuters/Andrew Winning

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BASEL, Switzerland/LONDON (Reuters) - 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 surcharge is part of a series of regulatory reforms launched in response to the financial crisis, which forced countries worldwide into costly bailouts of their banking sectors to prevent systemic collapses.

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, pushing the total to 3.5 percent.

The plans, which need approval from world leaders (G20) in November, would be phased in between January 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 over six years from 2013.

However, many of the world's biggest banks already hold core tier 1 capital ratios of 10 percent or more and therefore easily meet or exceed the top end of the surcharge band.

The central bankers have opted for a smaller surcharge than forseen but, in return, the surcharge will have to be in the form of top quality capital -- retained earnings or common equity.

This marks a victory for hardline countries such as Britain and the United States but will disappoint some banks that have been hoping to use hybrid debt such as contingent capital (CoCos) to pad out the surcharge band.

Dirk Jaeger, Managing Director for supervision matters at Germany's banks association BdB said the decision was not much of a surprise: "But we regret that bank levies and CoCo bonds do not count for the additional capital buffer."

COCOS REVIEWED

The proposal, which was due to be finalized 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.

The consultation paper in July will indicate how many banks face a capital surcharge but it is not clear yet if their names will be published.

The number of banks affected is likely to change over time as lenders grow or shrink and the consultation will spell out how often a snapshot of the sector will be taken.

Banks will face a surcharge according to an indicator that draws on five elements -- size, interconnectedness, 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 surcharge.

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.

(Additional reporting by Alexander Huebner in Germany; Editing by Toby Chopra)

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