WASHINGTON – The Financial Stability Board delivered a blow to Citigroup and JPMorgan Chase on Thursday, saying they will pay a 2.5% capital surcharge under Basel III while their competitors face less stringent requirements.
The international regulatory body designated eight U.S. firms last year as global systemically important banks, saying they must hold between 1% to 2.5% in extra capital. But Thursday marked the first time that the FSB detailed the exact requirements for each company.
Only Citi and JPMorgan face the highest surcharge, while Bank of America, Bank of New York Mellon, Goldman Sachs and Morgan Stanley must hold 1.5% in extra capital. State Street and Wells Fargo, meanwhile, received the lowest surcharge of 1%.
Overall, the FSB designated 28 firms – one less than last year – as globally significant. Just four companies world-wide face the 2.5% capital charge, with HSBC Holdings and Deutsche Bank also singled out by regulators.
Regulators added that they may assign an even higher surcharge in the future of 3.5%, primarily as a deterrent to keep banks from becoming even larger and increasing their systemic footprint.
The surcharge will not officially kick in until 2016, and even then it will only apply to those firms designated in November 2014 (potentially allowing firms to be added or dropped off the list of G-SIBs).
Still, analysts believe firms will likely have to hold the additional capital much sooner due to market expectations.
Citi said it is already prepping for the higher capital requirements, which would total 9.5%.
"Citi's estimated Tier 1 common ratio of 8.6% under Basel 3 at the end of the third quarter is among the highest in the industry. We expect to continue to generate capital through earnings and divestitures of non-core assets," said Shannon Bell, a spokeswoman for the bank.
Last year, international regulators under the FSB publicly named 29 financial firms as G-SIBs, despite a public outcry by the largest banks and their foreign counterparts that the extra capital cushion was excessive. The surcharge comes on top of a mandate for financial firms under the Basel III rules, which are required to hold 7% in common equity by 2019.
However, regulators left out some key details, including the exact size of the surcharge, which would be dependent on a bank's size, riskiness and interconnectedness. They agreed to postpone that decision until this November in order to determine the firm's surcharge based on more recently collected data from the end of 2011.
Regulators stressed they had made improvements to their calculations in assessing which companies were on the list, a key concern raised by bankers.
"The quality of data used in applying the identification methodology and to allocated G-SIBs into buckets for additional loss absorbency has improved considerably over the last year," the FSB said in its announcement.
Initially, global regulators looked at 73 financial firms as possible candidates to be considered systemically important and vowed each November they would update their list to reflect changes to the firms. Regulators argue that doing so will provide incentives to banks to reduce their systemic footprint.
This year two new banks – BBVA and Standard Chartered – were added to the list, while three other banks were removed, including Dexia, which is currently going under an orderly resolution process, along with Commerzbank and Lloyds.
Those firms no longer on the list will still be required to draw up recovery and resolution plans if their country supervisors deem them to be systemically important in the event of a crisis.
Additionally, the FSB agreed to extend its framework to include others entities such as domestic systemically important banks, or D-SIBs and global insurers that pose risk to the system. It also said it would devise a method to identify non-bank, non-insurance financial institutions.
In a separate report, the FSB also made additional recommendations to help regulators intensify supervision of systemic firms, ensure their effectiveness, and routinely assess operational risk.
"No supervisory system can catch everything. The more – and more sophisticated – activity of financial institutions has increased the array and intensity of the risks to which institutions are exposed," the FSB said in its report.
For example, the FSB said supervisors should be proactive in assessing succession plans at individual financial firms' chief executives and credit risk officers and not regard it as an internal matter.
Regulators should also talk more frequently and at a higher level with firms' board and senior management. Regulators of G-SIBS should also ensure that stress testing by financial firms is "comprehensive" and matches the risks and complexities by those institutions.
Recent high-profile episodes at firms like JPMorgan and Barclays have also increased the urgency of reviewing the Basel Committee's approach toward capital to deal with operational risk, the report said.