Global bank capital rules add “G-Sifi envy” to mix

5 min read
EMEA
, Peter Larsen

The G20’s decision to designate 29 banks as global systemically important financial institutions will introduce a new competitive dynamic to international finance in 2012: “G-Sifi envy.” Banks that made the list last month will be required to hold more capital. But they will also benefit from being codified as banks that are effectively too big to fail. That puts smaller rivals at a disadvantage. It’s a race to the top, but not in the way regulators envisaged.

In November, the G20’s Financial Stability Board identified those banks whose failure “would cause significant disruption to the wider financial system and economic activity.” The list, based on a series of measures including size, international reach and interconnectedness, included the usual suspects: Wall Street titans like JPMorgan, Goldman Sachs and Morgan Stanley; Switzerland’s big two; the largest commercial lenders in Europe, the UK, the United States and Japan; and custodial banks like State Street and Bank of New York.

But the list may be more notable for its omissions. For instance, no Canadian institution made the cut. And while Bank of China was added at the request of Chinese regulators, its immediate rival ICBC was not. Similarly, HSBC made the grade, but not Standard Chartered, with whom it competes tooth and nail in Asia. In Europe, Spain’s Santander and UniCredit of Italy are G-Sifis - but their cross-town rivals BBVA and Intesa are not. Nomura is a no-show, though Sumitomo, Mizuho and Mitsubishi UFJ appear.

Though most of the big banks fought against the G20 initiative, they are now expecting to benefit from the designation. From the start of next year, banks on the list will be forced by their national regulators to hold extra equity ranging from 1 percent to 2.5 percent of risk-weighted assets, depending on how big an impact their default might have on the financial system. Their resolution regimes - plans that allow big lenders to be wound down if they run into trouble - will also be subject to international scrutiny.

The extra capital will hit returns. But this is not such a disadvantage in countries like the UK, Italy and Spain, where regulators have already set higher capital hurdles for the biggest local banks. Moreover, in the eyes of credit rating agencies and customers, banks with a G-Sifi label will be deemed stronger counterparties. In certain businesses, particularly foreign exchange, credit derivatives, cash management, transaction processing and even equity and fixed-income trading, this competitive edge could outweigh the cost of holding more capital.

Lower funding costs may also accompany the halo effect of being too big to fail. That has certainly been the experience in the United States since the government stepped in to prop up the country’s biggest banks in 2008. Smaller U.S. banks pay almost 50 percent more than the top 100 lenders for deposits, the most stable form of funding, according to the Federal Deposit Insurance Corp’s most recent industry report.

Banks just below the G-Sifi radar may have to maintain even higher levels of capital in order to compete with their larger rivals for international business. Some may even pursue acquisitions in order to improve their chances of being added to the G-Sifi list when it is next reviewed.

Being a G-Sifi is not a one-way bet. The sliding capital scale means banks will have to hold more equity as they expand. In order to discourage the biggest banks from making themselves even more systemically important, regulators have also reserved the right to expand the capital buffer to 3.5 percent. And when regulators eventually draw up credible plans to wind down big lenders, the benefits of size should be diminished.

Those not on the list can equally try to make the case that they don’t need a label from the G20 to be deemed safe. Canadian banks, for instance, might be in a position to argue that the nation’s regulatory regime proved its superiority during the financial crisis.

Nevertheless, now that they’re stuck with it, some of the big banks are gearing up to make the G-Sifi label a central plank of their pitch to clients. It’s hardly what regulators had in mind when they first set out to tackle the too-big-to-fail problem.


Predictions: Breakingviews is publishing a series of articles over the holiday that look ahead to 2012. The pieces will be collected together in the annual ’Predictions Book,’ produced in print and electronic form early in the New Year.