July 19, 2011 / 4:51 PM / 6 years ago

Global capital surcharge to affect 28 big banks

LONDON (Reuters) - A global regulatory task force said on Tuesday its planned capital requirement surcharge to make the world’s biggest banks safer will affect 28 banks initially.

The Financial Stability Board (FSB) did not name the banks in its consultation paper on the new surcharge, which it confirmed in a news briefing on Monday would be set at between 1 and 2.5 percent.

The capital surcharge, which must be in the form of common equity, will have to be approved by world leaders (G20) at a summit in November to become fully effective by the end of 2018.

The size of the surcharge will depend on a calculation that weighs up five factors equally: size, cross-border activity, interconnectedness, complexity and substitutability.

The FSB said the resulting score would then determine which of four equal buckets a bank would be slotted into to fix the surcharge at 1 percent, 1.5 percent, 2 percent or 2.5 percent.

An initially empty 3.5 percent bucket has also been created as disincentive for banks to get significantly bigger.

The scoring system was thrashed out by the Basel Committee on Banking Supervision on behalf of the FSB.

“Based on the results of applying the methodology, the Basel Committee is of the view that the number of globally systemically important banks (G-SIBs) will initially be 28, including one bank that has been added based on supervisory judgment applied by the home supervisor,” the FSB consultation paper said.

“It should be noted that this number would evolve over time as banks change their behavior in response to the incentives of the G-SIB framework,” the FSB added.

The 28 banks that will face a surcharge are part of a wider sample of 73 large banks that will also be under review as banks pass in and out of the overall surcharge band.

Banks with a surcharge will be reviewed annually to check their scores.

The FSB estimated that a 1 percentage point increase in capital at the big banks will dampen economic growth by 0.17 to 3.17 basis point per year over a four-year implementation period.

The FSB wants the surcharge implemented between January 2016 and the end of 2018.

The initial set of G-SIB scores would be fixed no later than January 2014 and national jurisdictions will put the rules into law by January 2015, the FSB said.

The FSB also published a consultation paper on effective resolution of large banks.

Reporting by Huw Jones; Editing by Greg Mahlich and David Holmes

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