Forum Advocates for Review of Capital Surcharge

13 Nov 2019

Fed should evaluate calculation of GSIB surcharge to reflect post-crisis improvements to resiliency and resolvability

CONTACT: Barbara Hagenbaugh
(202) 457-8783

WASHINGTON, DC – The Federal Reserve Board should evaluate its calculation of a capital surcharge that applies to U.S. global systemically important bank holding companies (GSIBs) to reflect the significant improvements to resiliency and resolvability that have been made since the surcharge was finalized more than four years ago, the Financial Services Forum said.

The Forum this week commented on a proposal by the Fed to collect additional data from approximately three dozen banks, including Forum member institutions.  But before the agency incorporates the new data into the GSIB surcharge calculation, the Fed should first fulfill its commitment to regularly review the GSIB surcharge rule to avoid unintended consequences that could impede unnecessarily economic growth, the Forum said.

A periodic evaluation would allow the Federal Reserve Board to reflect significant improvements in financial stability since the GSIB surcharge’s adoption,” Financial Services Forum President and CEO Kevin Fromer said.

The Forum’s comments came in response to a proposal from the Fed to expand the quarterly banking organization systemic risk report, the FR Y-15, to collect additional data.  Data from the FR Y-15 are used by the Fed to calculate the GSIB surcharge. 

The Forum recommended the Fed launch a comprehensive review of the surcharge methodology as well as formalize a plan to review its calculation on a regular basis, such as every three to four years.  Such a review, which would include an opportunity for the public to comment, would adhere to the Fed’s pledge when it implemented the GSIB surcharge for a periodic evaluation in light of changing conditions. 

Earlier this year, the Fed sought comment on a proposal to expand the data requirements for Y-15 reporters. 

The Y-15 proposal came more than four years after the Fed issued a final rule establishing the GSIB surcharge, which was designed to reduce the likelihood of a GSIB failure, and to lower the probability of a threat to U.S. financial stability should a failure occur. 

The Fed, when it finalized the GSIB surcharge, pledged to regularly review its calculation.  Yet the agency has not conducted a review and has proposed to import the calculation into other capital rules, thus heightening the need to ensure it is measured appropriately, reflecting the current regulatory system. 

In the past four years, significant steps have been taken to advance the resiliency and resolvability of U.S. GSIBs.  The Fed has recognized this progress, noting in its inaugural Financial Stability Report, which provides an overview of the health of the U.S. financial system, that “Reforms undertaken since the financial crisis have made the U .S . financial system far more resilient than it was before the crisis…The nation’s largest banks are strongly capitalized.”

For more information on the GSIB surcharge and the improvements in resiliency and resolvability since its finalization, read the joint Forum-Bank Policy Institute blog, Seeing the Forest for the Trees: GSIB Capital and Enhanced GSIB Regulation.

To read the Forum’s comment letter, click here.


Learn More:

Seeing the Forest for the Trees: GSIB Capital and Enhanced GSIB Regulation Economists at the Forum and The Bank Policy Institute write how a holistic view of post-crisis bank regulation indicates that the GSIB capital surcharge should be reduced by at least 1 percentage point. Read the BankNotes blog post >