The Basel Committee on Banking Supervision will next week consider the need for changes to capital surcharges on the biggest banks amid warnings from lenders that the measures may stymie the financial system’s recovery, according to two people familiar with the talks.
The Basel group will weigh the criticisms from banks including BNP Paribas SA and Citigroup Inc. as it seeks to agree on the final version of the surcharge proposals, according to the people, who declined to be identified because the talks are private. Reserves that banks must hold to guard against the risk of a derivatives clearinghouse default and ensuring new capital requirements don’t hurt global trade also will be discussed at the Sept. 27-28 meeting in the Swiss city, they said.
Regulators in the committee “would be well advised to completely ignore the bank lobby that is using the current weakness of the global economy and the fragility of the banking system as levers to water down” the surcharge plans, said Sony Kapoor, managing director of policy group Re-Define Europe in London.
The Basel group agreed in June to impose stricter minimum capital requirements of as much as 2.5 percentage points of core reserves on banks whose failure could send shock waves throughout the financial system. Since then, sentiment toward European banks has been eroded by fears of a Greek default and speculation that Italy and Spain will be forced to seek international bailouts.
The euro-region crisis has left European lenders with as much as 300 billion euros ($404.4 billion) of credit risk, according to an International Monetary Fund report on Sept. 21. The turmoil may prompt governments to inject more capital into some lenders, according to Joaquin Almunia, the European Union’s antitrust chief.
Twenty-eight lenders would face surcharges if the rules were already in force, the Basel committee has said, without naming the companies. At least four banks would qualify for the top 2.5 percentage-point requirement, it said.
Some banks have warned that the Basel measures are excessive, would force them to curtail their lending, and have been poorly designed, with too much attention focused on firms’ size.
“Elementary wisdom would dictate delaying it for review once all other highly demanding regulatory measures have been implemented,” BNP Paribas, France’s biggest bank, said in its response to the Basel committee.
The surcharge proposals could discourage banks “from facilitating global trade,” Citigroup said in its response to the Basel consultation.
Banks should be categorized according to their size, interconnectedness, global reach and the scope for other firms to take over their functions should they fail, the committee said in June. The Basel group released the plans for public comment in July, and said it anticipates phasing in the rules between 2016 and the end of 2018.
Even though the timelines seem “fairly long,” there will be “market pressure for firms to move more quickly to the higher levels,” as soon as the Basel surcharge levels are finalized, Patricia Jackson, head of prudential advisory at Ernst & Young LLP in London, said in a phone interview.
“That’s why it starts raising a question of whether or not the Basel committee should go ahead now,” Jackson said.
The effects of Europe’s sovereign-debt crisis on its banks, the $2.3 billion trading loss that UBS AG disclosed this month, and the proposals on how to regulate U.K. banks made by a panel headed by former Bank of England Chief Economist John Vickers have “if anything” strengthened the case for “a bigger capital surcharge in the medium term,” said Re-Define Europe’s Kapoor.
The “fragile economic situation could be used as an argument to lower” the proposed surcharges, said Jesper Berg, senior vice president at Nykredit A/S, Denmark’s biggest mortgage bank. “On the other hand, I think that these numbers are not horrendous.”
The Financial Stability Board, which brings together regulators, central bankers and financial ministry officials from the Group of 20 countries, has said that work on the rules should be finished in time for them to be approved at a summit of leaders from the G20 in Cannes, France, on Nov. 3 to 4.
The FSB last year instructed the Basel committee, which includes regulators from 27 nations, to draw up the rules. The FSB will review the measures at a meeting on Oct. 3, the people said.