Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Banks May Get Some Capital Buffer Relief

New bank capital buffers may be less onerous that many expected, according to government officials familiar with the matter.

The capital requirements—which would apply to the so-called "systemically important financial institutions" or Sifis—may be in the 2 to 2.5 percent range. Earlier reports said that the biggest banks would be required to carry an additional 3 percent capital buffer.

Global regulators have been meeting in Frankfurt to reach on agreement on what is known as "the Sifi surcharge." US regulators have been pushing for a 3 percent buffer that could only be filled with common equity. European regulators have been pressing for a smaller buffer and would allow banks to meet the requirement with cheap, hybrid forms of capital.

US regulators have argued that in a crisis, only common equity will enable a bank to survive. During the financial crisis, many market actors took the position the a bank’s tangible common equity ratio was the best indicator of financial strength.

In a speech earlier this month, Fed governor Daniel Tarullo said that "it is important that an enhanced requirement be met with high-quality capital. Our presumption is that this means common equity, which is clearly the best buffer against loss and is what markets focused on during the crisis when evaluating the viability of financial firms."

Sources caution that negotiations are still under way.

Earlier this week JPMorgan Chief Jamie Dimon rose in an Atlanta meeting this week and directly confronted Fed Chairman Ben Bernanke over the numerous new banking regulations, including a new surcharge for the biggest banks.

Last year’s Basel III negotiations arrived at total capital requirement for banks of 7 percent of their risk weighted assets. The Sifi surcharge would be an additional capital requirement for the largest, most important financial institutions.


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