The GSIB Surcharge and International Competition: The Unlevel Playing Field

15 Mar 2021
Read Time 4 mins

Introduction

A key principle of a market-based economy is that vigorous competition is important for ensuring that consumers receive the best product at the best possible price. Policies that create barriers to fair competition and create an unlevel playing field have the opposite effect: competition is stifled and consumers and the broader economy suffer as a result. In this post, we highlight a key source of competitive inequity between large U.S. banks and large foreign banks – differences in capital requirements resulting from two conflicting approaches to the GSIB capital surcharge. Large banks in the U.S. are subject to a stricter and more punitive form of the GSIB surcharge relative to their foreign competitors. As a result, large U.S. banks face an unlevel playing field when competing against large foreign banks both at home and abroad. This competitive disadvantage for large U.S. banks impedes healthy competition and imposes significant costs on businesses, households, and the economy. Existing research suggests that higher U.S. GSIB surcharges may cost the U.S. economy between $20 billion and $90 billion per year in lost GDP.     

The GSIB Surcharge: The U.S. vs. The Rest of the World

The GSIB surcharge is an additional capital buffer that is required of the world’s largest and most significant banks – global systemically important banks, or “GSIBs.” All Financial Services Forum members are GSIBs and are subject to the GSIB surcharge. Due to the international nature of the market for banking services, the GSIB surcharge was negotiated internationally by members of the Basel Committee on Banking Supervision (BCBS) – an international group of banking regulators – to help ensure competitive equality in the global banking system. The Basel Committee finalized a global framework for the GSIB surcharge in 2013. In 2015, the Federal Reserve finalized its own GSIB surcharge ruleThe Federal Reserve’s GSIB surcharge rule is significantly different and more punitive than the agreed upon global framework. As a result, U.S. GSIBs are subject to considerably higher capital requirements than their foreign competitors.

The higher surcharge for U.S. GSIBs creates an immediate and significant source of competitive inequity for U.S. GSIBs relative to foreign banks because capital costs are a key determinant of the cost of banking services. As we have discussed previously, higher capital requirements directly translate into more costly, and less competitive, banking services. Ultimately, these costs are borne by businesses, households and the broader economy.  

The Competitive Disadvantage Created by Differing GSIB Surcharges

Figure 1 shows the GSIB surcharge that is applied to Forum members as well as the GSIB surcharge that is applied to large, foreign banks with a significant presence in the U.S. Specifically, the foreign banks included in Figure 1 collectively account for over $1.9 trillion in banking assets in the U.S and represent a significant source of competition for Forum members.  

Source: Financial Stability Board and Federal Reserve

As shown in Figure 1, U.S. GSIBs – Forum members – are generally subject to higher surcharges than their foreign counterparts. The asset-weighted average GSIB surcharge for Forum members is 2.7 percent while the asset-weighted average surcharge for their foreign peers is 1.3 percent. Because equity capital is a primary cost of providing banking services, higher capital requirements for U.S. GSIBs put them at a significant competitive disadvantage with their foreign peers – both at home and abroad. These higher capital requirements represent a measurable drag on the U.S. economy. Estimates from research suggest that higher capital requirements for U.S. GSIBs result in a cost of between $20 billion and $90 billion in lost U.S. GDP each year.

Given the significant competitive disadvantage documented in Figure 1, it is instructive to consider how GSIB surcharges would look for Forum members if they were subject to an internationally consistent GSIB surcharge. We present these surcharges in Figure 2.

Source: Financial Stability Board

As shown in Figure 2, GSIB surcharges for U.S. GSIBs would be significantly reduced and in line with those of foreign competitors if a common international standard were applied in the U.S. When a common approach to the GSIB surcharge is applied globally, U.S. GSIBs face an average surcharge of 1.8 percent as compared to an average surcharge of 1.3 percent for their foreign peers. International consistency in setting GSIB surcharges would create a more level playing field that would foster healthy competition benefitting businesses, households, and the broader economy.

Conclusion

Vigorous and healthy competition is a hallmark of a market economy that directly benefits businesses, households and the broader economy. The U.S. approach to setting GSIB capital surcharges is out of step with the agreed upon global standard and creates a significant competitive disadvantage for U.S. GSIBs relative to their foreign competitors. The higher GSIB surcharge for U.S. GSIBs also imposes significant costs on the economy of between $20 billion and $90 billion per year. Regulators should consider the costs to businesses, households, and the broader economy from regulatory policies that are not harmonized internationally, create an unlevel playing field, and handicap U.S. banks relative to their foreign competitors. 

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