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Basel Changes to Capital Surcharge Calculation Unwarranted
Proposed revisions would deliver little benefit, but higher costs and greater movement of activity to the non-bank sector
Washington, D.C. – Proposed revisions by the Basel Committee on Banking Supervision to the methodology for capital surcharges for Global Systemically Important Banks (GSIBs) would have a detrimental effect on the U.S. and global economies and would exacerbate the movement of financial activity outside the regulated banking system, the Financial Services Forum said Monday.
The Basel consultation would require all GSIBs to report and disclose specialized data (GSIB indicators) based on an average of daily values rather than using quarter-end values. In a letter to the Basel Committee, the Forum stated that using such high-frequency averaging in the methodology entails significant cost without any clear benefits and underscored the need for individual jurisdictions to wait to finalize their approaches to averaging until after the Basel Committee process has been finalized. The Federal Reserve issued a related proposal in July 2023. Uneven or uncoordinated adoption of standards would exacerbate already significant capital discrepancies among jurisdictions.
“Our member institutions serve a critical role in providing credit, liquidity and a range of key financial services fundamental to the continued growth and prosperity of the U.S. and global economies,” the Forum said. “Financial regulations that are not appropriately calibrated result in an inefficient financial system that misallocates capital in a way that can have a detrimental effect on the businesses and households that our member institutions serve, and on the U.S. and global economies as a whole, with no clear corresponding benefit to the resilience of the financial system.”
The Forum’s letter offered several key observations and recommendations regarding the proposal:
- High-frequency averaging would provide no material benefit to measuring or reducing systemic risk and would present significant operational challenges and disadvantages.
- No jurisdiction should finalize its revisions to the methodology until after the Basel Committee’s approach has been finalized.
- To create a more risk-sensitive GSIB framework, client clearing should be removed from the complexity category because it improves transparency, creates standardized products and reduces overall systemic risk.
The Forum’s full letter can be found here.
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The Financial Services Forum is an economic policy and advocacy organization whose members are the chief executive officers of the eight largest and most diversified financial institutions headquartered in the United States. Forum member institutions are a leading source of lending and investment in the United States and serve millions of consumers, businesses, investors, and communities throughout the country. The Forum promotes policies that support savings and investment, financial inclusion, deep and liquid capital markets, a competitive global marketplace, and a sound financial system.
Visit our website: fsforum.com