Eight US banks on too-big-to-fail list

28 institutions have been listed by the Financial Stability Board as 'systemically important' banks

The world’s too-big-to-fail list is out, and nearly a third of the banks on it are from the United States.

After the 2008 financial crisis, the Financial Stability Board, a body that coordinates international bank regulations, decided it would be a good idea to subject the world’s largest banks to tougher rules.

The thinking was that, since large-size banks posed a risk to the financial system, they needed to operate with higher loss buffers, or capital, than other lenders.

It was also hoped that the tougher regulations would act as an incentive to stop them growing further.
 

STOCK TAKING
The Financial Stability Board, a regulatory task force for the group of 20 top economies, on Thursday released this year’s list of “systemically important” banks

• 28 banks on the list, eight are from the United States: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo
• 4 buckets Banks split into four buckets. Top bucket has Citigroup, JPMorgan, Deutsche Bank and HSBC: Capital surcharge for this group bigger 
• 7 per cent Almost all banks will have to hold capital that is at least 7% of assets; systemically important banks will need more 
• 14 banks to have 1% of extra capital; but none in 3.5% range, considered a stick to stop banks from growing any bigger
• FSB to update requirements twice more over two years before they start going into effect in 2016
  Source: News agencies

On Thursday, the board released this year’s list of “systemically important” banks. Of the 28 banks on the list, eight are from the United States: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo.

The list has its own hierarchy, with the banks split into four buckets. In the top bucket are Citigroup and JPMorgan, along with Deutsche Bank and HSBC. The capital surcharge for being this group is bigger than it is for others on the list.

For some, the question is whether the amount is big enough.

Once new international bank regulations are fully in place by 2019, nearly all banks will have to hold capital that is at least seven per cent of their assets. But the systemically important banks will have to have even more capital. Citigroup and JPMorgan will have to hold additional capital that is equivalent to 2.5 percent of their risk-adjusted assets, taking them to an overall requirement of 9.5 per cent.

Even though JPMorgan and Citigroup have several years to get to 9.5 per cent, they say they are already reasonably close. In the third quarter, Citigroup estimated that it was already at 8.6 per cent and JPMorgan said its estimate was 8.4 per cent.

But these are just estimates. The banks have yet to fully comply with rules that may change outcomes in unexpected ways.

For instance, in 2013, these banks’ Wall Street operations have to adopt substantially stricter regulations that could weigh on capital estimates.

One problem with the stability board’s capital requirements is that they use something called risk weighted assets.

That means that assets are measured in a way that tries to take into account their differing risk levels. This has the effect of reducing the asset total for the purposes of calculating the capital ratio.

In other words, if no risk-weighting were used, the capital ratios would look a lot lower for several banks.

In addition, the stability board’s list may do little to answer the concerns of some analysts who feel the capital surcharges are too small.

For instance, on Thursday, the Federal Reserve Bank of Cleveland issued a paper on bank capital that is based on a conference earlier this year.

One participant at the conference, Martin Hellwig, from the University of Bonn, called for capital equivalent to 20 per cent of assets. Hellwig argued that much higher capital has “large social benefits” and “low social costs.”

 

© 2012 The New York Times News Service