Complex Networks: How Should 'Key' Global Banks Be Identified?

Now that European bank regulations are starting to kick in, bankers are starting to identify the ties that bind - and to lobby for relief. Sharlene Goff and Patrick Jenkins of the Financial Times explain the potential impact of being on or off the list:

"Regulators should include more than 80 banks in their list of global financial institutions of systemic importance that need tighter regulation and higher capital requirements, Douglas Flint, chairman of HSBC, has urged.

Mr Flint told an investor conference on Tuesday the list of “systemically important financial institutions” targeted for closer cross-border supervision should be expanded well beyond the 20 to 30 initially suggested by regulators.

He said this was needed to avoid competitive distortions building up in the banking market.

In a broad-ranging speech on regulatory changes at an investor conference organised by Morgan Stanley, Mr Flint also warned that separating banks’ retail and investment banking arms – an idea under review by the Independent Commission on Banking – could trigger an outflow of customers who may move to banks that could retain their universal structure.

He said this would prompt banks to “take decisions to protect their economic activity” – a comment that appeared to suggest that those affected may look at relocating out of the UK.

The issue of how much extra capital SIFIs must hold is high on the agenda of international regulators.

The Basel Committee on Banking Regulation is expected to pronounce within months how big that surcharge should be. Bankers are braced for a demand of an additional 1-3 per cent of equity as a proportion of risk-weighted assets.

Mr Flint warned that having too small a pool of SIFIs could create an uneven playing field for banks around the world. He said the number of SIFIs should be “somewhere over 80”.

A lower number would give groups left off the list an unfair advantage as they would not have to meet such onerous capital requirements, he said.

On the flipside, he believed banks within the group would likely take a greater share of business from those that had been excluded as they were better capitalised and more closely regulated.

“Those that are designated, if they are few in number, would see a more concentrated flow of business to them,” he said.

Mr Flint acknowledged there was still a “huge debate” surrounding the issue – and little clarity over where the surcharge could end up, with forecasts ranging from 0.5 to 9 percent.

Regulators claim to have no clear list at this stage, though several have suggested privately the total SIFI list is likely to comprise 20 or 30 banks.

Some banks are lobbying for the SIFI surcharge to be mitigated by other factors, such as the existence of a country-specific pre-funded bail-out fund.

International regulators have been debating for some time which banks should count as SIFIs.

It emerged a few months ago that they had agreed to split the biggest banks into global SIFIs, dubbed GSIFIs, and a second tier of nationally relevant SIFIs, designed to encompass groups that are highly significant within their national borders – such as several Japanese banks – but are not globally active.

A list drawn up by the Financial Stability Board, another global regulatory body, and seen by the Financial Times, included 30 groups, including six insurers.

However, regulators say there will be no insurers on the SIFI capital surcharge list.