Basel: the Sifi surcharge arrives
Basel has spoken, and the Sifi surcharge — the amount of extra capital that will have to be held by systemically important financial institutions — will range from 1% to 3.5%, with no bank in the first instance being subject to a surcharge of more than 2.5%.
This is more or less in line with expectations, and in fact is maybe a little bit tougher than was expected by some of the pessimists. It’s not the size of the surcharge which is particularly impressive, but more its nature: it’s made up only of the highest-quality capital — no CoCos allowed. And the fact that it’s based on a sliding scale means that it has the important feature of both dissuading the biggest banks from getting bigger and indeed giving them an incentive, at the margin, to get smaller.
The surcharge doesn’t end too big to fail, of course. Bethany McLean is absolutely right that capital requirements aren’t some kind of panacea, and that in and of themselves they don’t prevent crises. But they’re still a crucial part — along with liquidity and leverage constraints, and a crackdown on off-balance-sheet vehicles — of making the global banking system more robust, less pro-cyclical, and less prone to catastrophic failure.
And while the Sifi surcharge won’t stop banks growing to the point at which they have to be bailed out in extremis, it might make such growth significantly less profitable than it was in the past.
One of the peculiarities of the global financial crisis was the behavior of Citigroup’s deposits — here was a huge and insolvent bank, most of whose depositors were not insured. (Citi has many more deposits outside the US than it has domestically.) I was very worried about this: if those depositors moved their money out of an insolvent bank and into something safer, the consequences for Citi could have been disastrous. But the bank run never happened, and in fact over the course of the crisis Citi’s deposit base went up. That’s known as the moral-hazard play: depositors the world over trusted the US government to bail out Citi, as in fact it did, and knew that as a result their money was safe, backstopped by an implicit US government guarantee. Which you certainly can’t say about money held in a foreign branch of a mid-sized community bank.
That’s just one of many advantages to being huge, and as a result it’s great that Basel is forcing the likes of Citi to hold more capital than their smaller counterparts. It might be a relatively small victory, but every win counts.