Capital surcharge plan for banks to get Fed backing

The Federal Reserve supports a proposal at the Basel Committee on Banking Supervision that calls for a maximum capital surcharge of three percentage points on the largest global banks, according to a person familiar with the discussions.

International central bankers and supervisors meeting in Basel, Switzerland, have decided banks need to hold more capital to avoid

future taxpayer-funded bailouts. Financial stock indexes fell in Europe and the U S yesterday, as traders interpreted June 3 remarks by Fed Governor Daniel Tarullo as leaving the door open to surcharges of as much as seven percentage points.

“A seven percentage-point surcharge for the largest banks would be a disaster,” said Jason Goldberg, senior analyst at Barclays Capital Inc in New York. “It will certainly restrict lending and curb economic growth if true.” Basel regulators agreed last year to raise the minimum common equity requirement for banks to 4.5 per cent from 2 per cent, with an added buffer of 2.5 per cent for a total of 7 per cent of assets weighted for risk.

Basel members are also proposing that so-called global systemically important financial institutions (global SIFIs), hold an additional capital buffer equivalent to as much as three percentage points, a stance Fed officials haven’t opposed, the person said.

BANK INDEXES FALL
The Bloomberg Europe Banks and Financial Services Index fell 1.45 per cent yesterday, while the Standard & Poor’s 500 Index declined 1.1 per cent. The KBW Bank Index, which tracks shares of Citigroup Inc, Bank of America Corp, Wells Fargo & Co and 21 other companies, fell 2.1 per cent. In a June 3 speech, Tarullo presented a theoretical calculation with the global SIFI buffer as high as seven percentage points.