Global regulators this week put JPMorgan Chase & Co. and HSBC Holdings Plc at the pinnacle of a list of 29 too-big-to-fail banks that face tougher capital rules than other lenders. The companies were also handed a map to plot their descent.
For the first time since it started compiling a roster of lenders whose collapse would threaten the global economy, the Basel Committee on Banking Supervision also disclosed the thresholds for how it determined the level of extra capital requirements that such banks should face. The move will enable lenders to find ways to move down to a lower surcharge category or exit the list altogether.
The capital surcharges for globally systemic lenders add an extra layer of safety beyond beefed-up standards known as Basel III that emerged in the wake of the 2008 collapse of Lehman Brothers Holdings Inc. Regulators said the additional buffers were vital to protect taxpayers and prevent crises from cascading through the financial system.
“I think the Basel committee would be quite happy in this instance for banks to change their scores by becoming smaller, less interconnected, less complex,” said Patricia Jackson, head of prudential advisory at Ernst & Young LLP in London. “It’s also a shot across the bows in the sense that if they become more complex, larger, relative to others they go up the list.”
The Basel committee is the architect of Basel III, which would more than triple minimum rules on the core equity that banks should have to absorb losses. It also devised the list of systemic banks for the Financial Stability Board, which brings together regulators and central bankers from the Group of 20 nations.
It uses a combination of measures to decide which banks should be included on the list -- and what capital surcharge they should face. Regulators take into account lenders’ interconnectedness, their size, complexity, global reach, and the ability of other firms to take over their functions should they fail.
The extra requirements are set in half-percentage-point increments ranging from 1 percent of a bank’s risk-weighted assets to 2.5 percent.
On top of tougher capital requirements, banks on the FSB list also face greater oversight of their risk management and internal controls.
The new data should enable banks to work out “their end-2012 scores and see their positions within the buckets that, in future exercises, will determine their higher loss absorbency requirement,” the committee said in a statement on its website, in reference to the list. The information adds to details of the general methodology for calculating the surcharges, which was already public.
Spokesmen for JPMorgan and HSBC in London declined to comment.
Greater transparency “can help banks move in the direction regulators wish,” Huw van Steenis, head of European banking analysis at Morgan Stanley, in London, said in an e-mail.
Still, national rules and stress tests are “largely trumping” the FSB requirements, by forcing banks to hold even more capital, said van Steenis, whose employer is among the 29 listed banks and currently faces a 1.5 percentage point surcharge.
Banks and regulators have clashed over the economic consequences of forcing lenders to boost their capital, presenting competing assessments of the impact on growth.
The Basel committee estimated in 2010 that Basel III would trim global economic growth by a “modest” 0.22 percent over its implementation period. The banking industry has presented estimates that are several multiples higher.
Banks can boost their capital ratios in several ways, including by issuing ordinary shares and other instruments that count as capital, as well as by selling off assets or scaling back lending.
The largest global banks cut the shortfall in the reserves they’ll need to meet Basel capital rules, including the FSB surcharges, by 82.9 billion euros ($111 billion) in the second half of 2012, leaving a gap of 115 billion euros at the end of last year, according to data published by regulators in September. European banks accounted for 70.4 billion euros of the end-2012 shortfall.
Since the list system was devised in 2011, European and U.S. regulators have taken independent steps to toughen rules for their banks. The European Banking Authority requires some lenders to meet capital requirements equivalent to 9 percent of their risk-weighted assets.
Banks in the bloc also stand to face stress tests and asset quality reviews by the EBA and European Central Bank. In the U.S., regulators have indicated that some banks may have to meet leverage and liquidity rules that in some ways go beyond what is foreseen by Basel.
The clamor to meet other targets may make the capital surcharges “less of an issue,” said Jackson. And banks on the lower rungs may feel there is some security in being on the list, she said.
“There are certainly some banks who thought they were better off being included, so that investors see them as too-big-to-fail. At the same time, they probably don’t want to be one of the highest.”
One complication for lenders seeking a lower ranking on the list is that banks’ systemic importance is measured relative to other lenders.
“If a bank reduces its size and interconnectedness, but the whole group does as well, then the bank’s score will not change,” said Jackson.
The surcharges will be gradually phased in from 2016, and will be initially based on next year’s version of the list, to be calculated using data from the end of this year.
“There should come a day” when the FSB list is blank, Stephen Cecchetti, head of the monetary and economic department at the Bank for International Settlements, said last year. “That day will come when either the institutions change, the rules change, or both.”