And now, introducing the “Too Big to Fail” Tax.

Posted on June 27, 2011

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Finally, the continuing fall-out of the financial crisis will have an impact on those very institutions that made it possible.

The world’s largest banks will now be required to finance a larger share of their balance sheets with equity, or “Tier 1 Capital” in the future.   This past weekend international banking regulators agreed to require the world’s largest banks, those considered “too big to fail” to maintain capital cushions that are at much as 35% higher than those of other institutions, and several times greater than what they have needed to maintain in the past.

The regulators (and this blogger) hope the new rules, which will phase in gradually over the next seven years, will discourage lenders from imprudent risk taking and ensure that giant institutions can absorb sudden losses without imperiling the overall financial system or requiring taxpayer bailouts.

According to the Wall Street Journal (see article: “Capital Rules Tighten for Big Banks” http://online.wsj.com/article/SB10001424052702303627104576409662082986084.html?mod=rss_whats_news_us&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wsj%2Fxml%2Frss%2F3_7011+%28WSJ.com%3A+What%27s+News+US%29&utm_content=My+Yahoo)The The new agreement came after months of lobbying by financial groups on both sides of the Atlantic.  Big banks, which until now  have  avoided the capital surcharges advocated by senior U.S. policy makers will require roughly 30 of the world’s top banks to hold between 1% and 2.5% of extra capital as a percentage of their “risk-weighted assets.”  That is 14% to 35% more than the base 7% Tier 1 Capital requirement for all banks.

GRAPHIC FROM THE WALL STREET JOURNAL ONLINE, JUNE 27, 2011:

BIS

The rules also feature the threat of an additional 1% capital requirement on giant banks that grow bigger. The goal, the regulators said in a statement, is “to provide a disincentive for banks facing the highest charge to increase materially their global systemic importance in the future.”

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