Bigger capital burden ruling to clip Deutsche Bank's earnings
Deutsche Bank would be required to hold more capital and Bank of America's burden stands to be reduced as global regulators shuffled the competitive balance among the world's biggest banks.
Citigroup, HSBC and JP Morgan Chase join Deutsche Bank as firms that will be targeted for a capital surcharge of 2.5 per cent, according to an updated list published by the Financial Stability Board. The change means Bank of America exceeds requirements while Deutsche Bank would be more than two percentage points below the new minimum of 9.5 per cent.
"That limits earnings potential for Citigroup, JP Morgan and Deutsche Bank compared [with] Bank of America, all other things being equal, so it's certainly a competitive advantage for them," said David Kass, a professor at the University of Maryland's school of business.
The capital surcharges for systemic banks, set in half-percentage-point increments ranging from 1 per cent to 2.5 per cent, come on top of agreements by the Basel Committee on Banking Supervision to more than triple the core reserves they must hold against possible losses.
The extra requirements are calculated against banks' interconnectedness, size, complexity, global reach and the ability of other firms to take over their functions if they fail.
Royal Bank of Scotland will be subject to a 1.5 per cent buffer, down one percentage point from last year's list. Three banks - Dexia, Lloyds Banking and Commerzbank - were removed from the FSB's list. Standard Chartered and Banco Bilbao Vizcaya Argentaria, which were not included last year, were added to the group with the lowest surcharge.
Dexia is being broken up by the French and Belgian governments. The other two now off the list have seen a "decline in their global systemic importance", the FSB said.
"It would have been more helpful if FSB explained why some banks fell off the list and why some joined or moved around buckets - does this mean the framework was wrong last year?" said Barbara Matthews, of BCM International Regulatory Analytics in Washington.
"This is a classic case of informational asymmetry between banks, regulators and markets that perpetuates moral hazard."