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Big banks squawk about Basel Committee reforms

by Lisa Allen  |  Published August 30, 2011 at 6:04 PM
moneystack_228x128.jpegBig bank holding companies and financial groups are criticizing the Basel Committee's attempt to toughen capital standards for banks under Basel III, as well as a requirement that global systemically important banks face additional surcharges.

They warned the Secretariat of the Basel Committee on Banking Supervision last week that the additional requirements could go too far and harm lending and individual country economies. They also said the proposed formula for determining who would face the harshest surcharge needs major reworking.

"We have very serious concerns," the Global Financial Markets Association said in an Aug. 26 joint filing with the Association for Financial Markets in Europe, the Asia Securities Industry and Financial Markets Association and the Securities Industry and Financial Markets Association.

"GFMA believes the current proposal should be fundamentally revised and re-proposed."

The American Bankers Association said the proposal has significant flaws and that it has "fundamental reservations" over both the additional charges and the formula that would determine which bank holding companies would be affected.

"We believe as proposed, they will in fact reduce the ability of the banking industry to serve customers," the group wrote in its comments. "We do not accept the view that more capital is always the answer and strongly believe that excessive capital requirements are economically inefficient, permanently reducing the economic growth potential of the nation."

It suggested recent attempts to find other ways to wind down failed firms without taxpayer support and avoid "too big to fail" underscores "that the negative consequences associated with institutions perceived as too big to fail can be effectively addressed without a punitive add-on capital requirement."

Basel III negotiators in June proposed requiring big international banks to increase their capital by as much as 3.5 percentage points. In July they followed up with details of a plan that would also create a common equity capital surcharge on global systemically important banks. The surcharge would be from 1% to 3.5% over the Basel III requirements, with the exact surcharge based on a formula that would rate several factors including a bank's assets. They would take full effect in 2019.

While the comments questioned the wisdom of the new rules and the surcharges, they also offered criticism of the formulas and indicators, suggesting that they were technically flawed or, alternatively, not targeted enough.

H. Rodgin Cohen, a partner and former chairman at Sullivan & Cromwell LLP, said the technical criticism is likely to prompt negotiators to offer a revised proposal before proceeding.

"At the absolute minimum, there is a lot of thinking to do," he said.

Cohen also questioned the wisdom of moving forward on surcharges before having more of an indication of how the new Basel III capital requirements and attempts to bolster resolution procedures work to prevent too big to fail.

"The last thing you would do in this economy is to dampen lending," Cohen said in an interview.

The Global Financial Markets Association in its comments questioned whether any benefits of the surcharge would be more than offset by reduced economic growth and suggested there had been little economic analysis justifying the surcharge.

"The prospect of additional common equity capital requirements on top of Basel III has raised serious questions about the safety-growth trade off," the group said. It warned that the surcharge could have big effects.

"The risk to growth from the surcharge is likely to be significant, not modest ... [and] significantly diminish investor appetite for bank equity, which in turn would require banks to abandon more capital intensive businesses."

Bank of New York Mellon Corp., Northern Trust Corp. and State Street Corp. in a joint letter questioned some of the methodology for measuring potential systemic risk, saying too much weight was given to broad measures such as assets under custody, without enough to the actual risk profile.

Americans for Financial Reform, a coalition of consumer groups, suggested the surcharges were too low, not too high. It said that too many systemically significant banks would pay 1% to 2.5%.

"The benefits of higher capital levels for systemically important banks are clearly much greater than the benefits of higher capital for ordinary banks," the group said in a statement.
Tags: Bank of New York Mellon Corp. | banks | Basel Committee | M&A | Northern Trust Corp. | regulatory | State Street Corp

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