Three US banking giants represent greater systemic risks to the financial system than a year ago and have had their capital requirements increased in the Financial Stability Board’s (FSB) latest annual ranking.
Global banking regulator the FSB, led by Bank of England (BoE) governor Mark Carney, coordinates oversight of the most globally systemic banks and the three US banks, along with Industrial and Commercial Bank of China (ICBC), rose in the latest ranking while Morgan Stanley, HSBC and Barclays saw their capital surcharges fall.
The FSB lists the 30 globally systemically important banks (G-SIBs) as a way for financial regulators to indicate which ones are most likely to take down the rest of the world’s financial system were they were to go under and to force them to increase the capital buffers that can be used to absorb losses.
Regulators group the world’s banks into five buckets based on several factors, including size, complexity, cross-border activity, interconnectedness, sustainability and financial institution infrastructure. Each bucket has steadily increasing capital requirements, from an extra 1% of assets adjusted for risk for banks in the lowest bucket to a 3.5% capital add-on for those in the highest bucket. No banks are currently in the latter category.
Capital levels across the banking industry were increased after the 2008 financial crisis and regulators imposed surcharges for lenders deemed to present the biggest and most complex risks to the financial system. The extra capital requirements for systemically important lenders began to take effect in 2016 and are reviewed annually. The revised levels will take effect in 2018.
Citigroup’s buffer will rise to 2.5% of risk-weighted assets from 2%; Wells Fargo’s and ICBC’s to 1.5% from 1%. HSBC’s capital surcharge will fall to 2% of risk-weighted assets from 2.5% and Barclays’ surcharge falls to 1.5% from 2%. Citigroup responded that the rise “does not drive a binding capital constraint” on the bank, and that it is already subject to a 3% surcharge imposed by the US Federal Reserve.
“While no firm is likely to welcome the additional capital requirements resulting from being shunted into a higher G-SIB bucket, the changes reflect the growing share of US institutions in investment banking activities since the collapse of Lehman Brothers, after which they were recapitalized using funds from the Troubled Asset Relief Program (TARP),” noted Standard & Poor’s (S&P) Global Market Intelligence in its commentary.
“European banks, in contrast, repaired their capital positions more slowly, and many have been reining in investment banking activities since Basel III regulations hiked capital requirements for holding securities on their balance sheets.”
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