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Optimism in the Face of Capital Requirements and Surcharges

Change is in the air for banks, and it could take the form of mandated increases in capital requirements, as well as new surcharges. Unlike 2008, financial institutions classically deemed “too big to fail” would have the means on hand to bail out themselves -- or at least subsidize taxpayers’ efforts to clean up the mess.

For instance, , according to the Basel Committee on Banking Supervision. The Financial Stability Board (FSB) made it the committee’s mission last year to outline additional requirements for the bulge bracket.

Firms large enough to damage the world economy with their collapse would face even more requirements. Five categories of banks, grouped by size and potential danger to global banking health, would face surcharges between 1 percent to 3 percent,
reported on Monday.

“A surcharge of between 3 percent and around 3.5 percent will be imposed if a bank grew significantly and as a result posed larger systemic risks,” according to
. The FSB met Saturday to finish its draft of tougher financial rules, as requested by the Group of 20 (G20) top global economies, “even though many top banks already hold capital in line with the top end of the planned surcharge.”

As usual, not everyone seems happy. Bank of America Chief Executive Officer Brian T. Moynihan told
last week that disproportionate surcharges might restrict lending and dishearten investors.

“If you impact our returns and our business to a point, investors are going to look around and say there’s other places to put the money,” Moynihan said. “We just need to get through it, so the uncertainty is gone and we can figure out the change in business model.”

Ward Hagenaar, Cards and Payments partner at Utrecht-based consultancy Qhuba may be a bit more optimistic, though casting some blame on the financial institutions themselves. “The real threat to the position of banks are banks themselves,” Hagenaar wrote in
on Friday about recent conversations with bankers.

“They really mean well, but are so focused on the impossibilities ... that market driven innovation is hard to find,” Hagenarr continued. “Recent history shows that others are willing to disrupt in value chains that underperform in terms of customer value.”

So a renewed focus on the customer could be what saves the banks. New regulations or no.

Sounds good to me. How optimistic are you?


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