Deutsche bank faces top surcharge as FSB shuffles tiers
Deutsche Bank would be required to hold more capital and Bank of America Corp’s burden stands to be reduced as global regulators shuffled the competitive balance among the world’s biggest banks.
Citigroup Inc, HSBC Holdings Plc and JPMorgan Chase & Co join Deutsche Bank as firms that will be targeted for a capital surcharge of 2.5 percent, according to an updated list published yesterday by the Financial Stability Board. The change means Bank of America already exceeds requirements, while Deutsche Bank would be more than 2 percentage points below the new minimum of 9.5 percent. Citigroup, Deutsche Bank, HSBC and JPMorgan may be targeted by the Group of 20 nations for top capital surcharges of 2.5 percentage points, according to an updated list published by global regulators. The German lender was moved up from a lower tier by the Financial Stability Board. “That limits earnings potential for Citigroup, JPMorgan and Deutsche Bank compared to Bank of America, all other things being equal, so it’s certainly a competitive advantage for them,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business.
The capital surcharges for systemic banks, set in half- percentagepoint increments ranging from 1 percent to 2.5 percent, come on top of agreements by the Basel Committee on Banking Supervision to more than triple the core reserves they must hold against possible losses. The extra requirements are calculated against banks’ interconnectedness, size, complexity, global reach, and the ability of other firms to take over their functions if they fail. Royal Bank of Scotland Plc will be subject to a 1.5 percent buffer, down 1 percentage point from last year’s list. Three banks — Dexia SA Lloyds Banking Group Plc and Commerzbank AG - - were removed from the list, the FSB said. Standard Chartered Plc and Banco Bilbao Vizcaya Argentaria SA (BBVA), which weren’t included in 2011, were added to the lowest surcharge group.
Dexia is being broken up by the French and Belgian governments after losing access to unsecured funding. The other two have seen a “decline in their global systemic importance,” the FSB said. The quality of data it used in determining the list “improved considerably” from last year, the group said. “It would have been more helpful if FSB explained why some banks fell off the list and why some joined or moved around buckets — does this mean the framework was wrong last year?” said Barbara Matthews, managing director of BCM International Regulatory Analytics LLC, a Washington-based consulting firm. “This is a classic case of informational asymmetry between banks, regulators and markets that perpetu- ates moral hazard.” JPMorgan Chief Executive Officer Jamie Dimon last year predicted a “race to the top” as lenders tried to meet requirements well before the deadline and said his company would win business because of its higher capital levels.
Investment banks that aren’t in the top group will have to see if clients care whether they have as much capital as Citigroup and JPMorgan, said Christopher Wheeler, a London-based analyst at Mediobanca SpA.
“The guys at the top are stuck, and the guys below are scratching their heads and saying, ‘Do we have to go up and be in line to be competitive,’” Wheeler said. “If your clients don’t worry, you’re probably fine” to hold lower equi- ty capital, he said.
Barclays Plc (BARC) and BNP Paribas SA (BNP) may face surcharges of 2 percent. BNP, based in Paris, and Edinburgh-based RBS were previously targeted for the highest 2.5 percent surcharges. Charlotte, North Carolina-based Bank of America, the secondlargest U.S. lender, now faces capital requirements a full point lower than JPMorgan and Citigroup, the first- and third-biggest.
“Bank of America is a headscratcher,” said Christopher Kotowski, an Oppenheimer & Co. analyst. “How you would come to the conclusion that Bank of America is less of a SIFI and less risky than JPMorgan and Citibank is just a real puzzler.”