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The Basel Committee's overseeing body, the Group of
Governors and Head of Supervision, has agreed on measures requiring
globally systemically important banks (G-SIBs) to
hold additional capital.
According to the announcement, a G-SIB will be required to hold
an additional 1% to 2.5% Common Equity Tier 1 (ie.
shareholder's equity and retained earnings), depending on its
systemic importance. This surcharge will be on top of the minimum
4.5% Common Equity Tier 1 capital requirement for all banks imposed
under Basel III. These surcharges will be phased in from 1 January
2016 and will become fully effective on 1 January 2019.
Banks will be assessed on five broad categories to determine
their systemic importance: size, interconnectiveness, lack of
substitutability, global (cross-jurisdictional activity) and
complexity.
According to the Financial Times, approximately 30 banks will be
categorised as G-SIBs under the new criteria. JPMorgan, Citigroup,
Bank of America, Barclays, HSBC, The Royal Bank of Scotland, BNP
Paribas and Deutsche Bank are likely to make up the top category of
systemic importance with a 2.5% surcharge, while Goldman Sachs,
UBS, Credit Suisse and Morgan Stanley are expected to fall into the
second category of systemic importance with a 2% surcharge. Based
on these reports, it seems unlikely that Australian banks will be
subject to the G-SIB surcharge.
Interestingly, the Basel announcement stated that it wished to
prevent banks in the top category of systemic importance from
materially increasing their global reach and importance. The way
the Basel Committee intends to dissuade the largest banks from
becoming too large is to leave open the possibility that the
surcharge could be increased in the future by an additional 1%.
Although earlier reports indicated that the Basel Committee was
considering whether contingent capital instruments
(Cocos) could be used by G-SIBs to satisfy this
surcharge, the announcement ruled out the use of Cocos for this
purpose. It seems that the Basel Committee may have ultimately
rejected including Cocos in the surcharge as they are relatively
new instruments without a proven track record of being able to
absorb a bank's losses. Nevertheless, the Basel Committee did
state it would continue to review Cocos and would support their use
by national regulators who wanted to impose additional loss
absorbency requirements on their local banks over and above the
minimum Basel III requirements.
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