Surcharge deal for banks 'too big to fail'

CENTRAL BANKERS and regulators have agreed to impose an extra capital charge – of 1 per cent to 2.5 per cent of risk-adjusted assets – on the banks deemed “too big to fail” in a bid to protect them from the big losses that could trigger another financial meltdown.

The agreement, forged in Basel, represents a victory for countries like the US and the UK, which wanted 30 “global systemically important financial institutions” to carry additional capital to make them safer.

After months of wrangling, bankers finally forged a compromise deal that saw agreement on a smaller surcharge in exchange for a buffer made purely of equity.

The surcharge comes on top of the worldwide Basel III minimum of 7 per cent set last year for all banks. That means roughly eight of the biggest, most interconnected banks have to maintain top-quality “core tier one capital” equal to 9.5 per cent of their risk-weighted assets by 2019. About 20 more banks will face total ratios of 8 to 9 per cent.

The overseers of the Basel Committee on Banking Supervision also said they reserved the right to impose a further surcharge of 1 per cent on the top banks if they become even larger.

The central compromise saw the top surcharge drop from 3 to 2.5 per cent in exchange for preventing banks from using “contingent capital” – debt that converts to equity at times of trouble – to meet the requirements.

People familiar with the discussions have said that JP Morgan, Citigroup, Bank of America, Barclays, HSBC, Royal Bank of Scotland, BNP Paribas and Deutsche Bank are likely to make up the top category. Goldman Sachs, UBS, Credit Suisse and Morgan Stanley are expected to be in the second group with a 2 per cent surcharge.– Copyright The Financial Times Limited 2011