On July 20, 2015, the Federal Reserve Board issued a final rule imposing an additional capital surcharge on the largest US bank holding companies. This additional capital surcharge would be in addition to the capital conservation buffer already required under existing bank holding company capital requirements, and would be applicable to those bank holding companies that would qualify as “global systemically important bank holding companies” (GSIBs). Based on current financial data, eight US bank holding companies would currently fall within the GSIB category.
The additional capital charge will be phased in over a three year period beginning on January 1, 2016. A previous blog post discussed the proposed rule that had been issued in December 2014.
The additional surcharge is derived from a recommendation of the Basel Committee on Banking Supervision, an interagency group of the world’s bank supervisors that set capital and other supervisory standards to be adopted by each country. The goal of the surcharge is to equalize the expected loss from a GSIB’s failure to the expected loss of a large bank holding company that does not qualify as a GSIB.
Bank holding companies with consolidated assets of at least $50 billion already are considered systemically significant to the US financial system, and subject to additional capital and prudential requirements. Under the final rule, as in the proposal, whether such a bank holding company also will be considered to be a GSIB will be determined by two scoring methods. Method 1, derived from the Basel Committee recommendation, is based on the bank holding company’s size, interconnectedness, substitutability, complexity and cross-jurisdictional activity. Method 2, specific to the United States, replaces the substitutability factor from Method 1 with a factor based on the bank holding company’s reliance on short term wholesale funding, and generally would require the GSIB to hold more capital based on whether it relies more heavily on short-term wholesale funding.
Whichever method produces the highest score is used to determine whether a bank holding company is considered to be a GSIB, and, if so, the amount of the additional capital surcharge. The final rule contains detailed instructions on how to calculate the GSIB score and the capital surcharge. Based on current data, the Federal Reserve Board calculates that the eight GSIBs will be required to maintain additional capital cushions of 1.0 percent to 4.5 percent of the bank holding company’s total risk-based assets.
The Federal Reserve Board also issued a white paper on the method for calibration of the capital surcharge for each GSIB subject to the final rule, which is based on the harm it would cause to the financial system were the GSIB to fail, multiplied by the probability that it will fail (the “expected impact” methodology).