The Industrial & Commercial Bank of China was the only bank added to the Financial Stability Board’s (FSB) updated list of banks deemed “too big to fail.”
Global regulators revised the roster of lenders to determine which banks must hold extra capital to safeguard against another financial crisis.
Equity capital is seen as the best way to mitigate potential losses; but banks which are forced to hold large amounts of this capital may find it harder to earn shareholder-approved returns.
Mr Mark Carney, Chairman of the FSB, has stated FSB officials are “committed to ending too-big-to-fail [phenomenon]” – and stop the danger of institutions becoming too great and complex that a collapse would affect the broader financial system.
To this end, each year banks are identified into “buckets” based on factors such as its international presence, assets, liabilities and securities.
A bank’s bucket determines the percent of equity they are required to have against its risk-weighted assets.
Whilst the main buckets bestow 8%, 8.5%, 9%, and 9.5% ratios, there is an additional capital level of 10.5%.
However the 10.5% bucket has remained empty since the list’s inception; serving only to deter banks which may otherwise grow too large or engage in risky activity.
The annual exercise – one of the more prominent reforms to be born from the financial crisis – could define the world’s largest financial institutions’ profitability for decades to come.
ICBC in detail
With USD 2.95 trillion in assets and a USD 226.8 billion market capitalisation, ICBC is the world’s largest financial institution by a long stretch, and is also the most profitable.
Yet it is not only the size of the bank which has attracted the attention of the regulators, but – according to The Financial Times – its steadily growing international presence.
The British newspaper states that ICBC’s growing interconnectedness within the worldwide financial systems – which includes constantly acquiring, establishing or obtaining large stakes in small banks across Africa, Europe, South America, South-East Asia and the USA – is a prime reason for the bank’s inclusion on the FSB’s list.
ICBC’s new status will not have any immediate effect in business, as China already requires its largest banks to have a core tier 1 capital ratio of 8.5%; well above the FSB’s 8% rate. (In any case, the bank already reported a ratio of 10.48% in June.)
Instead, the rating could impact the bank’s aims to establish itself even more firmly in the international market.
The close attention of international regulators could be piqued if the bank continues to grow in complexity and interconnectedness abroad; as it will increase its need for additional capital reserves in order for the industry to remain protected.
The table as it stands
America’s JPMorgan Chase and Britain’s HSBC occupied the list’s most punitive position of a 9.5% capital buffer.
Deutsche Bank and Citigroup escaped ICBC’s top category; having been lowered to a tier requiring 9% capital ratios; which already contains Barclays and BNP Paribas.
Crédit Agricole – the largest bank in France – received an unwelcome promotion to the third tier which requires an 8.5% capital ratio, thus joining the ranks of Goldman Sachs and UBS.