Regulators add ICBC to financial stability risk league table

Seems potential risk is everywhere. Its all so screwed up.



Financial Times
By Tom Braithwaite
and Simon Rabinovitch
12 November 2013

International regulators have added Industrial and Commercial Bank of China to a list of banks that face higher capital requirements to counter the risk they pose to the financial system.

The biggest bank in the world by market capitalisation, ICBC was the sole new entrant on the latest table of “globally systemically important banks” from the Financial Stability Board.

 
The annual exercise – one of the reforms to emerge from the financial crisis – could determine the profitability of the world’s largest financial institutions for years to come.

JPMorgan Chase and HSBC occupied the most punitive position on the list, with a requirement to hold the biggest capital buffer: 9.5 per cent equity to risk-weighted assets compared with the 7 per cent ratio that all banks must reach.

The US bank has pledged to meet the requirement by the end of the year, in advance of a 2019 deadline, while the UK bank has already met its target.

ICBC already faces tougher capital requirements from Chinese regulators, so its designation as systemically important at the global level should not affect its operations. The China Banking Regulatory Commission has demanded that the country’s biggest banks hold 8.5 per cent of equity to risk-weighted assets, whereas ICBC’s new global status sets the level at 8 per cent.

Like most other Chinese banks, ICBC is already well above that threshold, hitting 10.6 per cent at the end of the third quarter.

Nevertheless, the global designation is an indication of the increasing international reach of ICBC, China’s most aggressive bank in expanding abroad in recent years. It has acquired small banks or taken major stakes in Africa, South America, the US and southeast Asia, as well as establishing branches throughout Europe.

Equity capital is seen as the best cushion against losses but banks forced to hold more than their peers may find it harder to earn a return on equity acceptable to shareholders.

Globally Systemically Important rankings

2013	2012
Category 5 *
None	None
Category 4 **
HSBC, JPMorgan Chase	Citigroup, Deutsche Bank, HSBC, JPMorgan
Category 3 ***
Barclays, BNP Paribas, Citigroup, Deutsche Bank	Barclays, BNP
Category 2 ****
Bank of America, Credit Suisse, Goldman Sachs, Crédit Agricole, Morgan Stanley, Mitsubishi UFJ, Royal Bank of Scotland, UBS	Bank of America, Bank of NY Mellon, Credit Suisse, Goldman, Morgan Stanley, Mitsubishi UFJ, RBS, UBS
Category 1 *****
Bank of China, Bank of NY Mellon, BBVA, Groupe BPCE, Industrial and Commercial Bank of China, ING, Mizuho, Nordea, Santander, Société Générale, Standard Chartered, State Street, Sumitomo Mitsui, UniCredit, Wells Fargo	Bank of China, BBVA, Groupe BPCE, Crédit Agricole, ING, Mizuho, Nordea, Santander, Société Générale, Standard Chartered, State Street, Sumitomo Mitsui, UniCredit, Wells Fargo
Guide
* Category 5: Capital ratio of 7% + 3.5% surcharge	** Category 4: Surcharge 2.5%
*** Category 3: Surcharge 2%	**** Category 2: Surcharge 1.5%
***** Category 1: Surcharge 1%	Source: Financial Stability Board

Deutsche Bank and Citigroup escaped from the top category, moving to a lower “bucket” in the league table with a requirement for 9 per cent capital ratios. Both banks have been attempting to shed riskier assets. They join Barclays and BNP Paribas in the second tier of banks.

Crédit Agricole got an unwelcome promotion to the third tier, requiring an 8.5 per cent capital ratio, the same level as Goldman Sachs and UBS.

The Federal Reserve is due to propose its own rules for the largest US banks. “The only question will be do they in fact require then to hold even more capital,” said Gregory Lyons, partner at Debevoise & Plimpton. He pointed out that the Fed has imposed higher standards than the international minimums for leverage ratios.

The FSB, chaired by Mark Carney, the governor of the Bank of England, gathers regulators around the world to co-ordinate financial standards.

Its ranking of the “systemic importance” of banks has an additional capital level of 10.5 per cent, which has been empty since the ranking started but stands as a deterrent to banks thinking of getting bigger or engaging in riskier activity.

Mr Carney wrote in the Financial Times in September that officials were “committed to ending too-big-to-fail” – the phenomenon of institutions becoming too large and complex to collapse without infecting the broader financial system.

“We have publicly identified globally systemic banks and insurers, and will subject them to higher capital requirements, more intensive supervision and credible resolution regimes,” he wrote.

original article found here