global systemically important banks

OFR Issues Report Challenging Standard for Identifying Systematically Important Banks

 

On October 26, 2017, the Office of Financial Research (“OFR”), an arm of the Treasury Department, issued a Report of its Director that challenges the standard set forth in the Dodd-Frank Act for determining which entities are systemically important and should be subject to the supervision of the Federal Reserve because their failure would pose the greatest risk to financial stability.

A new OFR viewpoint, “Size Alone is Not Sufficient to Identify Systemically Important Banks,” argues that a multifactor approach is superior to considering asset size alone to assess a bank’s systemic importance.

The Report observes that regulators already use such an approach to identify global systemically important banks (“G-SIBs”). They consider size and four other factors to measure a bank’s systemic importance: (1) interconnectedness, (2) substitutability, (3) complexity, and (4) cross-jurisdictional activity. The eight G-SIBs based in the United States face the most stringent standards.

The Report further notes that the OFR’s analysis indicates that a multifactor approach could replace the $50 billion asset-size threshold that some U.S. regulations use to identify U.S. banks that are not G-SIBs, but warrant enhanced regulation.

The Report asserts that such an approach could identify a much smaller group of non-G-SIB banks for enhanced prudential standards. Relatively large but less-systemic U.S. institutions might no longer face regulatory costs disproportionate to their importance. Smaller banks that play unique roles in U.S. markets, are more complex, or rely on short-term wholesale funding could continue to face higher standards.

Federal Reserve Board Releases a Proposed Rule to Impose Risk-Based Capital Surcharges on GSIB U.S. Bank Holding Companies

On December 9, the Federal Reserve Board (the “Board”) released a proposed rule (the “Proposed Rule”) to establish risk-based capital surcharges for U.S. bank holding companies identified as “global systemically important banking organizations (“GSIBs”).  The Proposed Rule is one of several enhanced prudential standards developed by the Board in accordance with Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Also, it is based on the framework adopted by the Basel Committee on Banking Supervision as modified to address risks unique to the U.S. financial system.

Under the methodology described in the Proposed Rule, to determine whether it is a GSIB, each U.S. top-tier bank holding company with total consolidated assets of $50 billion or more that is not a subsidiary of a non-U.S. banking organization would be required to annually calculate a systemic indicator score beginning December 31 of the year it crosses the $50 billion threshold.  Such score would be based on five systemic indicators—size, interconnectedness, substitutability, complexity and cross-jurisdictional activity.  If it is 130 basis points or greater, then such bank holding company would be designated as a GSIB and be subject to a GSIB surcharge.  A GSIB surcharge would be calculated using two methods—(a) method 1 based on the sum of systemic indicator scores reflecting size, interconnectedness, cross-jurisdictional activity, substitutability and complexity and (b) method 2 based on the sum of systemic indicator scores reflecting size, interconnectedness, cross-jurisdictional activity and complexity as well as a measure of use of short-term wholesale funding but excluding the systemic indicator scores reflecting substitutability.  The higher of the two surcharges determined under the two methods would be imposed on such bank holding company as a GSIB surcharge.

Currently, eight U.S. bank holding companies would be identified as GSIBs under the Proposed Rule.  The Board’s regulatory capital rule would need to be amended to increase a GSIB’s capital conservation buffer by the amount of its GSIB surcharge. 

The Proposed Rule would be phased in beginning 2016 at a rate of 25% per year and become fully effective on January 1, 2019.

Public comment is due no later than February 28, 2015.  ReleaseProposed Rule.

Basel Committee Final Rules on G-SIBs

On November 4, the Basel Committee on Banking Supervision issued rules for global systemically important banks (G-SIBs), outlining: (i) the committee’s framework to identify G-SIBs; (ii) the magnitude of additional loss absorbency G-SIBs should have; and (iii) procedures for phasing in the new requirement. Basel Committee Release. Final Rule.