On December 18, 2014, the Federal Reserve Board published in the Federal Register a Notice of Proposed Rulemaking that would impose additional capital requirements for the largest and most interconnected US bank holding companies. This surcharge would be in addition to the capital conservation buffer already required under existing bank holding company capital requirements. If adopted as proposed, the eight largest US bank holding companies would be subject to this additional capital surcharge, which would be fully effective January 1, 2019.
The proposal is derived from a policy framework developed by the Financial Stability Board (FSB), a group of the world’s banking regulators, central bankers and other banking experts, in order to deal with the systemic and moral hazard risks of global systemically important financial institutions.
Adapting the FSB’s nomenclature, under the proposed rule, the first step is to determine if a particular bank holding company is a “global systemically important banking organization,” or GSIB. A bank holding company with total consolidated assets of $50 billion or more would have to annually determine whether it fit the definition of a GSIB. A formula for a basis point systemic indicator score is proposed setting forth five categories that must be reviewed: size, interconnectedness, substitutability, complexity and cross-jurisdictional activity.
Once designated as a GSIB if the bank holding company’s systemic indicator score is 130 basis points or greater, the GSIB would then calculate specific surcharges using two methods. The GSIB then would be required to comply with the higher of the two surcharges.
The “Method 1 surcharge” is based on the bank holding company’s systemic indicator score and begins at 1.0 percent and increases to 3.5 percent and higher, depending upon the total systemic indicator score.
The “Method 2 surcharge” is calculated using the size, interconnectedness, complexity and cross-jurisdictional activity factors of the systemic indicator formula, but instead of substitutability, the bank holding company would instead add a quantitative measure of its short term wholesale funding. The Notice discussed the Federal Reserve Board’s view that reliance on short term wholesale funding can leave firms vulnerable to runs during periods of financial stress that can undermine financial stability. Under Method 2, a GSIB would be required to hold more capital based on whether it relies more heavily on short-term wholesale funding. The surcharge starts at 1 percent and increases to 5.5 percent and higher, depending upon the total score calculated under Method 2.
A failure to comply with the GSIB surcharge will restrict the GSIB’s ability to make capital distributions or bonus payments.
Comments should be filed no later than March 2, 2015.