January 16, 2024
Proposed Increases in Capital Surcharges for Largest U.S. Banks Unwarranted
GSIB surcharge proposal based on outdated methodology and further widens disparity between U.S. and international rules
Washington, D.C. – Proposed changes to the capital surcharge rule for the 8 U.S.-based Global Systemically Important Banks (GSIBs) are expected to lead to increased capital requirements and do not address the use of outdated methodology for calculating the requirements, the Financial Services Forum said Tuesday.
Responding to a proposal from the Federal Reserve Board to adjust the GSIB surcharge framework, the Forum in a joint comment letter supported some of the changes, but noted the proposal would lead to even greater capital requirements for the largest U.S. banks without clear justification for those increases from the agency.
The Forum emphasized the need for the Federal Reserve to account for economic growth and inflation in the calculation of the GSIB surcharge. The Fed has failed to review and adjust the calculation of the surcharge to reflect the inflationary effects of overall economic growth, as it indicated it would when the GSIB surcharge rule was enacted in 2015. Since that time, the surcharges for U.S. GSIBs have increased in large part due to economic growth and inflation, which in no way suggests heightened systemic risk.
Additional hikes in U.S. GSIB surcharges would widen even further the gap in rules between U.S. and foreign jurisdictions and make the United States even further out of step with international capital accords agreed to in Basel, Switzerland.
“The excessive stringency of the U.S. standard in both the proposal and the current approach worsen, rather than improve, international capital discrepancies, hurting U.S. economic competitiveness and undermining the Basel Committee objective of enhanced comparability,” the Forum said.
Capital acts as a cushion against losses. The GSIB surcharge is an additional capital buffer required of the 8 U.S GSIBs. Since 2009, U.S. GSIBs have more than tripled their high-quality capital to approximately $928 billion and have acted as a source of support, including during the pandemic and regional banking crisis. In the Federal Reserve’s annual stress test review of capital adequacy last year, the Fed said large banks were “well positioned to weather a severe recession and continue to lend to households and businesses.”
Foreign jurisdictions have implemented surcharges for their GSIBs at a lower level than U.S. regulators.
“The preexisting and proposed divergences from the Basel framework are not in service of American interests—rather, they would impose additional requirements on U.S. GSIBs that would harm the American economy and the ability of U.S. GSIBs to compete internationally,” the Forum said. “Similarly, the potential increases in required capital that would result from the proposal would exacerbate the movement of financial activity outside the regulated banking system, threatening consumers and financial stability.”
The Forum supported some of the proposed changes, including the narrowing of the “bands” for the GSIB scores as well as using quarter-end averages rather than relying on December 31 as a single datapoint for calculating surcharge requirements.
The Forum’s full comments can be found here.
###