By Steve Slater
LONDON (Reuters) - About 30 banks will be formally anointed as the industry's most important players this week; a rather dubious honour costing them billions of dollars each in additional reserves and placing them under increased regulatory scrutiny.
Policymakers have leaned on the world's biggest banks to raise their capital reserves by retaining earnings, selling shares or curbing dividend payouts to avoid a repeat of the past financial crisis and large-scale taxpayer-funded bailouts.
Capital cushions have already been plumped in response to national watchdogs' demands, but the Financial Stability Board (FSB) that coordinates financial regulation worldwide this week unveils its formal list of global systemically important banks, known as G-SIBs, which have to hold more capital from 2016.
"It's not a positive thing (being a G-SIB). There are higher expectations, you have to hold more capital and the oversight is a little bit more intense," Tim Sloan, head of wholesale banking for U.S. bank Wells Fargo, told Reuters.
The FSB divides the systemically important banks into five categories, determined by their size, geographic spread, complexity and potential impact on the financial system.
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Lenders placed in the top group would have increase their capital cushion by 3.5 percentage points above the standard global regulatory minimum, though none has appeared in draft lists for a category that was designed mainly to deter banks from growing too large.
For banks in the next category down, the requirement is for an additional 2.5 percentage points. In a draft list last year only HSBC and JP Morgan were in that group. Based on their risk-weighted assets that would mean each having to hold an additional $30 billion of capital.
When the concept of systemic importance was first unveiled, there was speculation that banks given such a designation could benefit from lower funding costs or be rewarded by investors for having bigger safety nets or for being more likely to be saved in a crisis.
The reality has proved otherwise.
'ZERO ADVANTAGE'
"There's zero advantage to being a G-SIB. The funding advantage could be 15-20 basis points, but that would be way more than offset by the excess capital they have to hold and the amount of regulatory and compliance cost that is built in," Bernstein analyst Chirantan Barua said.
Banks on the FSB list have had to lead the way in establishing "living wills" detailing how they would be wound down if they collapse. They also face having to make an earlier start than smaller rivals in issuing bonds that can be written off in the event of a banking crisis without guarantees to reimburse the bondholders.
National authorities are also picking out big banks for special treatment. The Bank of England last week announced that it will use the FSB rankings to help to set leverage levels for British lenders.
The big banks have already improved capital levels in preparation for the FSB surcharges, which the regulator has tried to flag in draft lists, but the need to keep capital reserves high will leave them little room for manoeuvre.
There were 29 systemically important global players on last year's draft list, including one addition from the previous year's list. Bankers and analysts said that the list should be relatively stable over time, though one or two names could move in or out each year and banks could shift between categories.
In last year's draft list, Barclays, BNP Paribas, Citigroup and Deutsche Bank sat in the group of third-largest banks, requiring them to hold 2 percent extra capital.
Another eight banks, including Goldman Sachs and UBS, sat in the group requiring a 1.5 percent surcharge, while 15 more, including China's ICBC, Wells Fargo and Santander, were in the bottom category needing them to hold 1 percent extra.
(See the full list at: https://bsmedia.business-standard.comwww.financialstabilityboard.org/publications/r_131111.pdf)
(Editing by Carmel Crimmins and David Goodman)