The Federal Reserve Board recently proposed for public comment amendments to its risk-based capital rule that would impose a risk-based capital surcharge on eight US global systemically important banks ("G-SIBs"). In general, the proposed G-SIB surcharge would be higher than the G-SIB surcharge agreed to by the Basel Committee. However, the Federal Reserve Board estimates that all eight of the G-SIBs would meet the G-SIB surcharge when fully phased in. The proposed surcharge would not apply to US bank holding companies controlled by foreign banking organizations, although the Federal Reserve Board requested comment on that aspect of the Proposal. If adopted as proposed, it would become fully effective on January 1, 2019.

Overview

On December 9, 2014, the Board of Governors of the Federal Reserve System ("Federal Reserve Board") approved for public comment a proposed rule (the "Proposal") imposing a risk-based capital surcharge that would apply to eight US G-SIBs.1 The Proposal is based on an international standard adopted by the Basel Committee on Banking Supervision (the "Basel Committee") in November 2011 (after considering comments received on a proposal issued in July 2011) and further refined since that time. The Proposal would amend the Federal Reserve Board's risk-based capital rules and was issued under Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), which generally requires the Federal Reserve Board to subject large bank holding companies to enhanced prudential standards. However, the Federal Reserve Board has delayed for future consideration whether to include the G-SIB surcharge as a component of its capital planning and CCAR programs, which require banking organizations to meet minimum capital requirements under stressed circumstances.

The proposal consists of two basic parts: (1) the identification of a G-SIB and (2) the calculation of the G-SIB surcharge amount.

  • The identification of a G-SIB: The proposal will require all US bank holding companies ("BHCs") with $50 billion or more in consolidated assets to calculate their systemic importance based on a list of 12 indicators that fall within five broad categories. If a BHC meets a certain "G-SIB threshold," which eight BHCs would meet based on data as of December 31, 2013, it will be required to hold additional common equity Tier 1 capital in accordance with its systemic risk profile. This additional capital requirement is called the "G-SIB surcharge."
  • The calculation of the G-SIB surcharge amount: The G-SIB surcharge will be an addition to the capital conservation buffer, which essentially requires a BHC to hold additional high-quality capital (i.e., common equity Tier 1 capital) above the minimum requirement in order to not be subject to limitations on capital distributions and certain discretionary bonus payments. The eight G-SIBS would be subject to an initial surcharge ranging between 1.0% and 4.5% depending on their individual systemic risk exposure. In contrast, under the Basel Committee methodology, the largest initial surcharge would be only 2.5%.

The stated goal of the G-SIB surcharge is to internalize the negative externalities posed by G-SIBs and the perception that they are too-big-to-fail, protect the financial system from spillover risks due to a G-SIB's failure, and correct for competitive distortions created by the G-SIB banks' systemic nature.2 The G-SIB surcharge, if adopted as proposed, would become effective on the same timeline as the capital conservation buffer and thus would be phased in beginning in 2016 and would become fully effective on January 1, 2019.

Footnotes

1 See the proposed rule published in the Federal Register at: http://www.gpo.gov/fdsys/pkg/FR-2014-12-18/pdf/2014-29330.pdf .

2. See 79 Fed. Reg. 75473 at 75474-75 (Dec. 18, 2014) published at: http://www.gpo.gov/fdsys/pkg/FR-2014-12-18/pdf/2014-29330.pdf .

To view full article click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.