Draghi Says Biggest Banks May Face Tougher Rules Than Basel III Provisions
Mario Draghi
SeongJoon Cho/Bloomberg
Mario Draghi, chairman of the Financial Stability Board (FSB) and governor of the Banca d'Italia, listens at the Korea-FSB Financial Reform Conference in Seoul.
Mario Draghi, chairman of the Financial Stability Board (FSB) and governor of the Banca d'Italia, listens at the Korea-FSB Financial Reform Conference in Seoul. Photographer: SeongJoon Cho/Bloomberg
Financial Stability Board Chairman Mario Draghi renewed calls for capital rules for the largest lenders that go beyond the Basel III proposals earlier this month from global regulators.
Draghi said in Paris today that systemically important financial institutions should have the ability to absorb more losses than smaller banks. Draghi, who is also governor of the Bank of Italy, made similar comments in newspapers in the U.K. and his home country earlier this month.
Regulators of the 27-nation Basel Committee on Banking Supervision reached an agreement on Sept. 12 on new rules that more than double capital requirements for banks, while giving them as long as eight years to comply in full. Adair Turner, the chairman of the U.K. financial regulator, last week also said he would have set higher capital requirements for systemically important banks.
“We want a strong financial system with higher capital standards,” Draghi said. “We have a proper transition period so that we don’t risk hampering the economy.”
The Basel Committee proposals will force lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Banks that fail to meet the buffer would be unable to pay dividends, though they wouldn’t be forced to raise cash. Lenders will have less than five years to comply with the minimum ratios and until Jan. 1, 2019, to meet the buffer requirements.
G20 Meeting
The FSB will make additional proposals to the Group of 20 Nations at a November meeting in the South Korean capital. The FSB was established by G20 leaders in April 2009 to coordinate the work of national regulators and international standard setting agencies.
The regulators and central bankers at the FSB are studying what types of extra capital beyond the Basel III requirements could be sought for the largest lenders, including capital surcharges, contingent capital such as convertible bonds, or “bailed-in assets.”
“The FSB and the Basel committee have been very clear about this issue -- there will be some sort of additional capital requirement coming for the biggest banks soon,” said Barbara Matthews, managing director of BCM International Regulatory Analytics LLC in Washington. “Big banks should be worried, and are already worried, because the combination of all these new rules will have a great impact on their business models and profitability.”
Changing Markets
Draghi said he was confident the U.S., which didn’t adopt the last round of Basel reforms, would enact the latest proposals.
“Markets are not what they were 25 years ago when you could differentiate,” he said. “Everyone understands that markets are global and everyone wants to avoid regulatory arbitrage.”
Draghi also said that the FSB would give the G20 a set of proposals on over-the-counter derivatives trading at the Seoul meeting. The European Union is weighing rules that would force most over-the-counter derivatives trades to go through central clearinghouses.
The FSB is also reviewing proposals to reduce financial institutions’ reliance on credit ratings firms, he said.
To contact the reporter on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
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