Jean-Claude Trichet, president of the European Central Bank (ECB) and chairman of the Group of Governors and Heads of Supervision, said the agreement would “help address the negative externalities and moral hazard posed by global systemically important banks.”
The banking group, which serves as the oversight body of the Basel Committee on Banking Supervision, agreed on additional loss absorbency requirements ranging from 1 percent to 2.5 percent of capital. An additional 1 percent surcharge could be applied as a “disincentive” for banks facing the highest charge to increase risk levels.
The intergovernmental organization charged with setting capital standards passed the new requirements as monetary leaders faced divisions within Europe and the US on how high capital requirements should be to protect against bank failure on a worldwide scale.
Nout Wellink, chairman of the Basel Committee on Banking Supervision and president of the Netherlands Bank, said the measures will “enhance the resiliency of the banking system and help mitigate the wider spillover risks of global systemically important banks.”
The new surcharge comes along with a new Basel III requirement that global banks hold top-quality capital totaling 7 percent of their risk-bearing assets.
US bank regulators have complained about the lack of constraint among European financial institutions, which have been setting their own capital requirements.
“Just as troubling is that European banks continue to effectively set their own capital requirements using internal risk estimates, unconstrained by any objective hard limits,” Federal Deposit Insurance Corp. chairman Sheila Bair said earlier this month.
The Bank for International Settlements describes itself as an international organization for monetary policy cooperation; it also serves as a bank for central banks. Member-countries include the US.
Now that the Group of Governors and Heads of Supervision have approved the new requirements, the body will submit the document to the Financial Stability Board, which is coordinating the overall set of measures on capital requirements.
The group laid out the assessment methodology for globally significant banks based on size, interconnectedness, lack of substitutability, global cross-jurisdictional activity and complexity.
(MarketWatch)
