With what Chairman Janet Yellen described as a “milestone” in efforts to mitigate threats the nation’s biggest big banks could pose to financial stability, the Federal Reserve's Board of Governors is proposing a new risk-based capital surcharge for the most systemically important firms.
The proposed framework would provide incentives to these banks to hold substantially increased levels of high-quality capital as a percentage of their risk-weighted assets. The stated goal is that they will effectively reduce their systemic footprint and lessen the domino effect a failure could trigger.
The proposed rule, approved at Tuesday’s meeting of Fed governors, would implement a methodology for determining whether a U.S. top-tier bank holding company with total consolidated assets of $50 billion or more will be identified as a global systemically important banking organization (GSIB). The proposal establishes five broad categories correlated with systemic importance—size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity—that will be used to calculate a numerical score that would be used for the determination. Each category will be evaluated with a 12-point test that includes such factors as an institution’s balance sheet size and its reliance on short-term wholesale funding.
GSIB’s would face graduated capital surcharges of up to 4 percent on already mandated capital conservation buffers. For example, if a GSIB’s surcharge was 3 percent, it would need to maintain a common equity tier 1 capital ratio in excess of 10 percent. Under the Fed’s existing regulatory capital rule, banks must hold a minimum of 4.5 percent of risk-weighted assets in common equity tier 1 capital and an additional 2.5 percent capital conservation buffer in order to avoid restrictions on capital distributions (such as dividend payments to stock holders) and discretionary bonus payments to executives. Using yearend 2013 data, eight bank holding companies would currently be identified as GSIBs under the proposal; based on 2013 data the surcharge would amount to between 1.0 to 4.5 percent of risk-weighted assets.
The proposed surcharge would be phased in beginning on January 1,2016 and become fully effective on Jan. 1, 2019.
The Financial Services Roundtable is among the trade groups already speaking out against the plan. “The proposal could affect the American financial industry’s ability to remain competitive in international markets,” Richard Foster, the group’s vice president and senior counsel for regulatory and legal affairs said in a statement.