Use cash for buffers before dividends, G20 panel tells banks

Fri Apr 20, 2012 4:49pm EDT

* FSB says banks can bump up capital from own resources

* Supervisors get more discretion over big domestic banks

* FSB hints at margins for repos, securities lending

* Single accounting rules delayed for third time to mid 2013

By Huw Jones

LONDON, April 20 (Reuters) - Banks can meet their tougher capital requirements by giving less of their earnings to shareholders over a six-year phase-in starting next year, global regulators said on Friday.

The Financial Stability Board, the regulatory arm of the world's top economies represented at the Group of 20, said banks were making progress in strengthening their balance sheets but some still have losses to absorb.

FSB Chairman Mark Carney said in a letter to G20 finance ministers meeting in Washington that the amount of capital the biggest banks will need to meet the so-called Basel III rules being phased in over six years from 2013 is equal to only 1.5 times their combined profits last year.

"Hence, although there is considerable variation across banks, the industry in aggregate has the capacity to meet the new targets through earnings retention and reduced distributions over the transition period," Carney said in his letter.

Banks have long warned that complying with the Basel rules in full, along with surcharges for the largest lenders, could force them to cut back on loans to businesses, potentially hurting already struggling economies.

Carney, who is also governor of the Bank of Canada, said the FSB was making progress on reform pledges G20 leaders made in 2009 at the height of the financial crisis in a bid to avert the need for taxpayer rescues of banks in future market meltdowns.

A framework for tougher supervision of the next tier of systemically important banks - big domestic banks - will be ready by November and will be tailored locally.

This would "ensure compatibility" with the framework that will be introduced for the 30 or so biggest cross-border banks in the world from 2016, who face a capital surcharge of 1 percent to 2.5 percent on top of the Basel 7 percent minimum core tier 1 buffer all banks will have to hold.

The FSB hinted there may not be a mandatory surcharge for the second-tier banks. I t has faced pushback to surcharges from several countries who argue their large domestic banks pose no risk to the broader financial system.

The FSB said the "assessment and application of policy tools should include an appropriate degree of national discretion."

This compares with the requirement for all G20 countries to apply capital surcharges on the biggest banks in a consistent way.

SHADOW BANKS

The FSB will publish recommendations by the end of 2012 for regulating the $60 trillion shadow banking sector, which are involved in financing like traditional banks but are less regulated, such as money market funds, hedge funds, repos and conduits.

The recommendations will "dampen risks and pro-cyclical incentives" in securities lending and repos, meaning the FSB is likely to push ahead with minimum initial margins on repos topped up with an "add on" margin in overheated markets, a step that will mark a sea change in the sector.

The FSB said it is looking at whether banks should be forced to hold more capital if they are exposed to different parts of the shadow banking sector.

Money market funds could also be required to hold liquidity buffers so they can meet redemption calls more easily.

Progress on creating a single global set of accounting rules, however, remains slow and the FSB has been forced to extend the original end 2010 deadline for a third time to mid 2013.

The International Accounting Standards Board (IASB), whose rules are used in over 100 countries, and the U.S. Financial Accounting Standards Board (FASB) are trying to align their rules.

The IASB hopes the United States will adopt IASB rules outright, effectively the final step in turning rules forged by the London-based body into a truly global standard.

The convergence delay could mean that the United States could further delay its decision, which had been pencilled in for last year, on whether to adopt IASB rules, especially as the U.S. presidential elections also loom.

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