The world's biggest banks face a capital surcharge of up to three percent in a bid to keep taxpayers off the hook next time a lender gets into difficulty, Bundesbank and industry officials said on Friday.
But a surcharge of between 3 percent and around 3.5 percent will be imposed if a bank grew significantly and as a result posed larger systemic risks, banking sources told Reuters.
The Financial Stability Board, tasked by the world's top 20 economies (G20) to toughen up financial rules, meets on July 18 to finalize its blueprint.
Before then regulators will hold a series of preparatory meetings to iron out elements of the capital surcharge plan that are still being contested even though many top banks already hold capital in line with the top end of the planned surcharge.
No final decision has been made, a source familiar with the talks said.
It's still very fluid, a second source added.
The basic structure, however, is set be in line with what regulators and bankers have been saying over the past year.
Bundesbank board member Andreas Dombret said on Friday that 25 to 30 of globally systemically important financial institutions (G-SIFIs) will in all likelihood have to hold 2 to 3 percentage points more capital than others.
Such capital add-ons do more than merely improve the resilience of a SIFI, in other words reduce its probability of failure, Dombret said in a speech.
They surely are also a suitable instrument with which to put a price tag on the implicit guarantee that SIFIs are deemed to enjoy, Dombret added.
The blueprint is about a year behind schedule due to bickering among G20 countries over whose banks will be deemed G-SIFIs, and whether other measures, also in the blueprint, such as effective wind-up mechanisms could be a substitute for surcharges at some banks.
International Monetary Fund researchers said this month the surcharge should be significantly more than the 1-3 percent being worked on but banks say regulators should look at the cumulative impact of all the new rules on banks.
A top British regulator has signaled that total core capital of around 15 percent is best in an ideal world, some five percent above where UK banks are now.
Switzerland wants its two biggest banks UBS and Credit Suisse to hold core equity capital of 10 percent and a further 9 percent in hybrid debt known as contingent capital.
BIG BANKS FIRST
Initially the surcharge will apply only to the biggest banks such as Goldman Sachs, HSBC, Deutsche Bank and Morgan Stanley.
Other big institutions whose collapse could destabilize the wider financial system, as did the demise of Lehman Brothers in 2008, would be brought under the net later on in the teeth of fierce lobbying from big insurers.
The surcharge will depend on criteria regulators have already outlined, such as how interconnected the bank is to the rest of the financial system and how easily its operations could be substituted by another lender.
I think it will be 1 to 3 percent of capital in six steps, depending on the degree of G-SIFIness, one banking source said.
It's still under discussion if pure investment banks are see as less important for the stability of the system than diversified banks, a second European banking source said.
European bank shares appeared little moved by the well aired prospect of a capital surcharge, with the sector down 0.3 percent, outperforming the broader market which was off 0.7 percent.
It remains unclear when the capital surcharges would kick in, but many of the biggest banks already hold capital at these levels due to pressure from local supervisors in countries like Switzerland, Britain and the United States.
I think the British banks are already there. The bigger issue is going to be liquidity as banks are even more concerned about this, said Simon Hills, a director at the British Bankers' Association.
Basel III introduces the first global liquidity standards which will force banks to top up with large chunks of government bonds to comply.
The capital surcharge will be on top of the new global Basel III minimum capital of 7 percent set for all banks from 2013.
The blueprint will be published by the FSB in late July for public consultation before G20 leaders endorse them in November.
The biggest of the G-SIFIs would hold around 10 percent in Core Tier 1 capital, the main benchmark of a bank's stability.
Some banks may need to change the mix of capital.
Much will hinge on whether the surcharge has to be in the purest form of capital -- common equity -- or whether banks will be allowed to include some hybrid debt known as contingent capital or CoCos which convert to equity under stress.
Bundesbank's Dombret said CoCos should be included among the instruments acceptable as a surcharge but banking sources said hard line countries like Britain appear to be winning the argument for common equity.
We would like to be able to meet the SIFI buffer with CoCos but they are leaning more to the purest form of equity, they said.