THE INTERNATIONAL Monetary Fund yesterday urged US and European regulators to consider imposing higher bespoke capital requirements on “systemically important” banks deemed “too big to fail”.

The discussion of capital surcharges for big banks will prove controversial. Bankers have argued that large institutions should not be penalised by regulators because of their size.

US and European governments have pledged to overhaul regulation to avoid a repeat of the huge public bailouts of troubled institutions from Citigroup and Royal Bank of Scotland – as well as Ireland’s main banks – seen during the financial crisis.

The European Union has thrown its weight behind a levy on banks in a draft letter to G20 countries, as pressure builds globally to tax an industry many see as responsible for the financial crash.

The move comes as European finance ministers prepare for a meeting this week, at which they will attempt to settle differences over how best to impose extra taxes on banks. Although most countries support such a tax, which would be popular with voters who blame banks for the recession, many disagree over how the money should be spent.

Pressure is building as the International Monetary Fund prepares to present bank levy recommendations to finance ministers of the G20 when they meet next week in Washington.

Although the IMF said yesterday that it was “not necessarily endorsing” the surcharge concept, its 27-page assessment of the theory adds further weight to an idea that is gaining international momentum.

The fund argues that without strong tools to prevent banks from taking outsized risks, the proposed creation of “systemic regulators” in the US and Europe would do little to protect the world from another devastating banking crisis.

Under the proposals discussed by the IMF, regulators would rank banks according to the probability they might fail in a crisis and the risk they pose to the rest of the domestic and global financial system. The ratings, which would be kept confidential to prevent a run on the weaker banks, would be used to determine how much more capital each institution would have to keep on its balance sheet in order to lessen the risk of a systemic failure.

Under one of the IMF’s calculations, riskier banks would have to set aside an average 1 per cent of their risk-weighted assets, on top of other capital requirements, to account for their systemic importance. – (Copyright The Financial Times Limited 2010/Reuters)