UniCredit and Societe Generale Must Raise Additional Capital

Systemically important banks must further increase capital to successfully absorb losses in the future and spare taxpayers the burden of bailouts, concluded international regulators.

The Financial Stability Board (FSB) was established by the group of 20 largest developed and developing economies, G20, to refine regulations for the financial sector and prevent a recurrence of the financial crisis of 2007-2009 when the burden of bailing out lenders fell on taxpayers. The board identified a group of systemically important banks, which includes Citigroup, Deutsche Bank, Santander, UniCredit, HSBC, Societe Generale, BNP Paribas, Bank of America, and Credit Suisse.

Their failure would seriously undermine the stability of the financial system. In the initial phase, the list included 29 banks, but their number was reduced to 28 in the latest FSB report, after Dexia, Commerzbank, and Lloyds Banking Group were excluded and BBVA and Standard Chartered were added. In the latest report, the FSB for the first time specified how much additional capital each bank must raise. Thus, Citigroup, Deutsche Bank, HSBC, and JPMorgan Chase must raise an additional 2.5 percent of common equity measured against risk-weighted assets, on top of the already mandated minimum of seven percent that they are required to gradually reach from January of this year.

The additional capital is intended to protect the financial system from threats that could be generated by large banks in the event of a crisis. It should also spare taxpayers the costs of their bailouts. The next group that must raise two percent additional capital includes Barclays and BNP Paribas. Bank of America, Credit Suisse, Goldman Sachs, UBS, and four other banks must raise 1.5 percent additional capital. The remaining 14 banks, including UniCredit and Societe Generale, as well as Santander, BBVA, and Credit Agricole, must raise one percent additional capital. The FSB will update its requirements two more times over the next two years, and the new regulations are expected to come into effect in 2016.

A higher level of common equity, or financing through shares, will make it more difficult for banks to extract profits from their balance sheets while also providing them with better protection in the event of losses. The FSB’s report was published just before the G20 finance ministers’ meeting in Mexico this weekend, where governments will consider the implementation of new regulations for the financial sector.