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FSB Revises Big Banks’ Capital Surcharge Categories


The Financial Stability Board (FSB) has come up with the updated list of globally systemically important banks (G-SIB). While the name and number of banks in the list remained the same, several banks’ categories were revised.

Before going in to the details about the changes in categories, let’s first understand what these categories are and why are these provided.

Following the 2008 financial crisis, with an aim to improve accountability, the global regulators moved to increase capital levels across the financial sector and imposed surcharges on banks that are deemed to be systemically important to the financial system. There are 30 firms considered to be G-SIB and subject to additional capital requirements.

Based on several parameters (including size, complexity, interconnection, cross-border activity and sustainability), regulators have classified these banks into five potential categories, with the banks in the highest category requiring to hold 3.5% capital surcharge above the minimum regulatory requirements. The lowest level G-SIB requires holding 1% additional capital.

The surcharges for G-SIB began taking effect from 2016 and are reviewed every year. Notably, the changes announced this time will be required to be effective from Jan 2018.

Citigroup, JPMorgan tops the G-SIB list

Following the review, Citigroup Inc. C has joined its counterpart JPMorgan Chase & Co. JPM – the top of G-SIB list – both requiring 2.5% capital surcharge. Notably, Citigroup already faces 3% additional capital requirement under the Fed rules. The company spokeswoman said, “The G.S.I.B. measure announced this morning by the F.S.B. does not have an impact on any of Citi’s binding regulatory metrics.”

Additionally, Bank of America Corporation BAC and Wells Fargo & Company WFC, along with Industrial and Commercial Bank of China have been moved up from their categories assigned last year. While BofA is in the third category, facing 2% surcharge, Wells Fargo and Industrial and Commercial Bank of China require 1.5% additional capital.

The strengthening of U.S. dollar against the British pound and several other currencies was largely responsible for the latest revision in rank for the U.S. banks.

Further, the FSB lowered the surcharge required by Morgan Stanley MS, HSBC Holdings plc HSBC and Barclays PLC BCS. These three banks have been divesting risky and non-core operations, which is one of the reasons for lower level of surcharge required.

HSBC (earlier topped the list, along with JPMorgan) now joins Deutsche Bank AG DB and BNP Paribas SA BNPQY, at the third category. Moreover, Barclays has been dropped to the category with 1.5% surcharge, while Morgan Stanley now requires 1% additional capital.

Notably, there are no banks at the highest category, requiring 3.5% surcharge.

The FSB stated the revision “reflect the combined effects of data quality improvements, changes in underlying activity, and the use of supervisory judgment.”

Of the banks mentioned above, BofA and Morgan Stanley currently hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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