The Bank for International Settlements has announced:
the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision (BCBS), agreed on a consultative document setting out measures for global systemically important banks (G-SIBs). These measures include the methodology for assessing systemic importance, the additional required capital and the arrangements by which they will be phased in. These measures will strengthen the resilience of G-SIBs and create strong incentives for them to reduce their systemic importance over time.
The GHOS is submitting this consultative document to the Financial Stability Board (FSB), which is coordinating the overall set of measures to reduce the moral hazard posed by global systemically important financial institutions. This package of measures will be issued for consultation around the end of July 2011.
The assessment methodology for G-SIBs is based on an indicator-based approach and comprises five broad categories: size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity and complexity.
The additional loss absorbency requirements are to be met with a progressive Common Equity Tier 1 (CET1) capital requirement ranging from 1% to 2.5%, depending on a bank’s systemic importance. To provide a disincentive for banks facing the highest charge to increase materially their global systemic importance in the future, an additional 1% surcharge would be applied in such circumstances.
The higher loss absorbency requirements will be introduced in parallel with the Basel III capital conservation and countercyclical buffers, ie between 1 January 2016 and year end 2018 becoming fully effective on 1 January 2019.
The GHOS and BCBS will continue to review contingent capital, and support the use of contingent capital to meet higher national loss absorbency requirements than the global minimum, as high-trigger contingent capital could help absorb losses on a going concern basis.
I have mixed views on this. I reported last August that the push towards surcharges was gaining ground and have been advocating surcharges based on size since (at least!) March 2009.
However, I am unfavourably disposed towards the narrow focus of the plan, which affects only “global systemically important banks” as defined by the regulators and then uses an as-yet untested formula “based on an indicator-based approach and comprises five broad categories: size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity and complexity” to assess the surcharge imposed. There’s a lot of room for error there, and a lot of room for lobbying. There’s also a lot of cliff effect: what will be the effect on the markets when a bank’s G-SIB status is changed? What if it changes during the height of a crisis? What if a well capitalized medium sized bank is interested in purchasing a failing medium sized bank during a crisis? We saw that during the crisis, a lot of the American banks bulked up – will they be willing to bid next time? And finally, of course, the subjective nature of the G-SIB status determination opens up the door for a lot of lobbying and corruption.
I would be much happier with a system that was formula-based and applied to all banks on a progressive basis.
I was very pleased to see that the committees “support the use of contingent capital to meet higher national loss absorbency requirements than the global minimum, as high-trigger contingent capital could help absorb losses on a going concern basis”. The critical part of that phrase is high-trigger contingent capital, which is really one in the eye for those morons at OSFI, who have decided that the lowest possible trigger is the best. However, the “low-trigger” policy was enacted during the reign of the Assistant Croupier; now that he has departed for a greener pastures with a company he used to regulate (see June 14), the new incumbent may have different ideas.