Higher Reserve Requirement to regulate ‘Too Big to Fail’ banks

From The New York Times – The Basel Committee on Banking Supervision proposed that large investment banks would need to hold a capital reserve between 1 and 2.5% of their assets to cope with any unforeseen losses. Banks already have a 7% minimum core-capital buffer level so the additional requirement reduces the money available for further investment. Regulators also plan to introduce a surcharge based on a number of factors:
1. Bank’s size
2. Complexity of the bank
3. Closeness to of its links to other large trading partners globally
4. Involvement in risky activities that would “increase materially” the threat to the financial system.

Also some large firms will be identified as systemically important financial insitiutions – SIFIS. These are global financial services firms – almost exclusively banks – so big that governments believe they will be forced to rescue these institutions rather than risk lasting damage to the world financial system from a collapse. These banks will cost more to clean up so therefore should hold more capital. There are still disagreements over the criteria for choosing SIFIS. Some large Chinese, Japanese and European banks are lobbying for exemptions or lower charges because they are domestically focused.

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