On 19 July 2011, the Basel Committee on Banking
Supervision ("BCBS") and the Financial Stability Board ("FSB") published two
papers relating to entities regarded as globally systemic important financial
institutions ("G-SIFIs"). The first paper prepared by the BCBS which we
consider in more detail below sets out proposals for an assessment methodology
for determining whether a banking institution should be regarded as a globally systemically
important bank ("G-SIB") and the additional capital requirements that G-SIBs
should be subject to.
The second paper prepared by the FSB, which we will
discuss in a separate alert, sets out proposals for a
framework for the resolution of failing institutions.
In finalising its new Basel III framework at the end of
2010, the BCBS mandated all banks to hold significantly more capital than is
currently the case as well as introducing new leverage and liquidity ratios. The
changes included increasing the minimum amount of common equity (principally ordinary
shares and retained earnings) to be held by banks from 2% to 4.5% of risk
weighted assets during a transitional period between 1 January 2013 and 1
January 2015, with total tier 1 capital rising from 4% of risk weighted assets
to 6% during the same period. Banks will also be required to build up a capital
conservation buffer to be comprised of common equity of up to 2.5% of risk
weighted assets and may also be subject to additional counter cyclical buffers
that can be imposed by local regulators.
The Basel III rules apply to all banks. In addition, the
FSB and the BCBS have been considering additional rules to apply to the largest
global banks to deal with concerns that such banks are regarded as too big to
fail (meaning relevant governments would, as in the financial crisis, be
prepared to use public funds to bail them out rather than face the systemic
consequences of their failure). The FSB has previously outlined the moral
hazard risks it believes arise from such institutions being regarded as too big
to fail4 and mandated the BCBS to develop a methodology to assess the systemic
importance of G-SIBs and additional measures that should be put in place to enhance
their ability to absorb losses. This work was endorsed by the G-20 group of
nations at their meeting in Seoul in November 2010. The BCBS paper referred to
above sets out its proposals in this regard and, following the end of the
consultation process, the BCBS is expected to present its final proposals to
the next G-20 meeting in Cannes in November 2011.
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