FRANKFURT (Reuters) - A proposed capital surcharge for big banks is not anti-American and will help reduce the risk of big bank failures, a top European regulator said on Monday.
Thomas Huertas, alternate chairperson of the EU’s powerful watchdog, the European Banking Authority, said the planned 1 to 2.5 percent bank capital surcharge on banks’ risk-weighted assets would help reduce the probability that any large bank — known as a Systemically Important Financial Institution (SIFI) — would fail.
Earlier this month, JP Morgan Chase (JPM.N) Chief Executive Jamie Dimon said the United States should consider pulling out of the Basel group of global regulators, which is drafting the new banking rules, known as Basel III. Dimon had called the rules ‘anti-American.
“The SIFI-surcharge is not anti-American, it is anti-big financial institutions,” Huertas told a financial conference.
“These institutions represent a concentration risk to the taxpayers of the world and society,” Huertas said.
“As Lehman demonstrated, the failure of one of these institutions can have very adverse effects on markets and the overall economy.”
Huertas said there was a strong case for approving the SIFI surcharge as proposed.
Basel banking regulators are due to agree the surcharge at the end of this month, with final approval by the G20 group of developed and emerging nations expected in November. The surcharge is not due to become fully effective before the end of 2018.
“I think there is a substantial basis for the agreement,” Huertas said.
The list of SIFIs is expected to include 28 globally active banks, which will be subject not only to the surcharge but also additional scrutiny by financial regulators. Banks will migrate on and off the list over time as their systemic importance changes.
Huertas added that he fully expected the United States to implement the Basel III package.
The new rules will force banks to develop new business models to satisfy customers, creditors and regulators, as well as shareholders, he said.
“If banks want to live in the market, they have to be able to die in the market,” Huertas said.
“How does that circle get squared? Certainly not by the continuation of the belief that banks can earn a return on equity in excess of 20 percent while remaining a AA+ rated company,” said Huertas, who is also a member of the Executive Committee of the UK’s Financial Services Authority.
Basel III probably would accelerate the trend for companies to bypass banks and go directly to financial markets for financing, a trend that was already well advanced in the United States, Huertas said.
Speaking at the same conference, the chief economist of bank lobby the Institute of International Finance warned that the wave of banking reforms risked crimping lending activity as developed world economies struggle with the aftermath of the financial crisis.
“The reforms will have a material impact, holding down the expansion. It’s the wrong time to be doing them,” Philip Suttle told the conference, calculating that the rules could knock a cumulative 3 percent off global GDP growth by 2015.
“I worry that the reforms being promulgated won’t produce the stability effects hoped for,” he added.
Reporting by Jonathan Gould. Editing by Jane Merriman