Citi, JPMorgan & RBS Will Likely See Highest Basel Capital Surcharges

A provisional list by global regulators mentions that Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM) and The Royal Bank of Scotland (RBS) Group (NYSE:RBS) are likely to face the highest capital surcharge of 2.5% under the agreed upon Basel norms. ^[1] The list, which classifies 29 global banks into various categories on the basis of their asset size at the end of 2009, suggests that these banks’ reserves will need to be maintained at 1 to 2.5 percentage points above the agreed-upon minimum capital levels – although it is expected to be revised repeatedly until the regulation kicks in in 2016. While the regulation seeks to ensure that bigger banks are better protected from failing, there is also a fear of banks hiding data about their actual risk levels in order to avoid higher surcharges.

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Global banks have been beefing up their capital structures in the aftermath of the economic downturn as there has been an increased focus on ensuring the sustainability of banks’ operations in the event of a financial crisis. While various regulations have been debated – with a considerable number of them already in place – the need for banks to boost their reserve levels comes unanimously from regulators.

These changes are being worked on by the G20 nations and takes into account the “banks’ interconnectedness, size, complexity, global reach, and the ability of other firms to take over their functions if they fail.” ^[1] While regulators are waiting for end-of-2010 data from banks, we expect the list to remain more or less the same.

Bank of America (NYSE:BAC), Barclays (NYSE:BCS) and Deutsche Bank (NYSE:DB) have been grouped in the category that faces a 2% additional capital requirement, whereas Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE:MS), BNY Mellon (NYSE:BK) and Swiss banks  UBS (NYSE:UBS) and Credit Suisse (NYSE:CS), will likely see a 1.5% surcharge. For the time being, Wells Fargo (NYSE:WFC) can rejoice the fact that it has been placed in the lowest category with a 1% surcharge.

With banks already raising their core Tier 1 capital through all available means, the implementation of the new Basel regulations may force banks to cut down on lending activities to meet the stringent criteria.

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1. Citi, JPMorgan May Face Highest Basel Capital Surcharges, Bloomberg, Nov 8 2011 [↩] [↩]