Big banks may escape capital surcharge as talks flounder

Leaders of the world’s largest economies, divided over how to curb risk-taking by their biggest banks, will likely fail to agree on a capital surcharge.

Instead, the Financial Stability Board, which is weighing measures to prevent such institutions from causing another economic crisis, will recommend a range of options without setting a level of extra capital to be imposed globally, said members of the group who declined to be identified because the discussions are private. The FSB will meet in Seoul next week.

The fissures running through the group are similar to those that split the Basel Committee on Banking Supervision when it considered tighter capital requirements for all banks this year. Germany, France and Japan are resisting a surcharge for big lenders, as are lobbyists for those firms, while the UK, US and Switzerland advocate the approach, members say. That camp agreed to soften some of the Basel capital rules with the understanding that more would be done to restrain the largest banks through the FSB.

“The remaining issues surrounding too-big-to-fail banks are tougher than what has been resolved, so that highlights the differences between these two camps even more,” said Richard Spillenkothen, a former member of the Basel committee who is now a director at Deloitte & Touche LLP in Washington. “The UK, US and Switzerland had to provide huge amounts of money to support their biggest troubled institutions, so they’re under pressure at home to prevent that from happening again.”

Global leaders pushed to revise banking regulations after the collapse of Lehman Brothers Holdings Inc in 2008 and the bailouts of banks that had become too big to fail. The Basel committee didn’t resolve the issue, leaving the FSB to come up with a solution. Now countries such as Switzerland are taking unilateral action, proposing higher capital requirements for their largest banks.

Increasing divisions among regulators may also prevent the FSB from coming up with a mechanism for winding down a failed bank with global operations, members say. The group will lay out a possible framework for how each nation’s mechanism should be structured and encourage countries with the largest global banks to sign bilateral agreements to share information and cooperate during the shutting down of financial firms.