THINK ACT

ACT: BANKINGREGULATIONS
This gives a total capital requirement of between 8% and
9.5%, as opposed to the 7% applying to all banks under
Basel III. The IMF has calculated that even 7% would
create an additional requirement of USD 360 m for the
world’s 62 largest banks.
The exact surcharge depends on which of the four categories
of systemic importance the institution falls into. The
financial institution’s balance-sheet total is one yardstick,
and the Basel committee has recommended that four additional
benchmarks be used: interconnectedness, global
reach, complexity, and substitutability by other providers.
In the United States, the Dodd-Frank Act defines a bank
that is “too big to fail” as one with a balance-sheet total
of over USD 50 bn. Below this level, it is not systemically
important. At the international level, a more complex formula
has been used which takes different business models
into account, and is compatible with the Basel III rules.
Although SIFIs initially rejected the criteria, they will
now have to exceed them and they are starting to get used
to their newfound status. Of course, increased solvency
requirements will erode their margins, but this could be
offset by the advantages of refinancing.
The calculation is that as highly stable SIFIs, financial
institutions will earn better ratings and achieve lower risk
premiums than banks with less capital, thereby establishing
themselves as safe havens for investors in bonds and
certificates. There are also benefits for deposit-taking business
because, as Deutsche Bank CEO Josef Ackermann points
out, customers “would rather invest their money with SIFIs.”
At first, shareholders were alarmed by the prospect
of their companies retaining profits to create additional
buffers or increase capital. Now they are starting to see
the silver lining – this will make their investments more
attractive and lower-risk.
Dodd-Frank Act attracts widespread praise
Whatever people think about Basel III and SIFIs, there is no
doubt that the industry’s situation will change drastically –
not just for SIFIs, but for all providers. There will be no
generous transition periods; it will happen immediately.
Banks without adequate capital and financing could be
forced to withdraw from previously attractive areas of the
market and pass on their expensive refinancing costs to
clients, which will reduce their competitiveness. Conversely,
the changes would create additional opportunities for
financial services providers that revalue their businesses
to allow for risks as part of an overall banking strategy.
“It’s potentially quite a simple question,” says Udo
Bröskamp, head of Roland Berger Strategy Consultants’
Competence Center financial services. “How do I make
the best use of my capital in the future?”
It’s potentially a simple
question: “How do I make
the best use of my capital
in the future?”
However, he says, the answer is more complicated because
businesses need to take into account the indirect effects of the
new rules and their own national laws. “Some countries have
already pressed ahead on banking regulation, while others
will take their time implementing it, possibly making creative
use of the SIFI criteria to give domestic banks a temporary
competitive advantage.”
Adopting such an approach to industrial policy could
do more harm than good. Non-SIFIs may think that lower
equity requirements have given them a head start, but sooner
or later they could be forced to maintain higher voluntary
buffers to signify their solvency to the market, where the
investors will not necessarily know how institutions have
been classified by regulators.
For example, big banks whose business is primarily
domestic could have huge balance sheet totals but still be
placed in lower categories, or left out of the equation
altogether. If the experience of the recent financial markets
crisis is indicative, it seems likely that a big domestic bank
with its fingers in lots of pies could cause just as much
damage as a SIFI if it crashed.
There have been dire warnings that banks could simply
shift their business to regions with more relaxed rules;
however, this is largely a ploy by lobbyists. “In reality, there’s
limited scope for regulatory arbitrage,” Bröskamp says. “First
in terms of time, because rules tend to converge as the years
go by, and secondly, geographically, because you can’t just
move and take your customers with you.”
64 THINK ACT SEPTEMBER 2011