The Federal Reserve Board on July 20 approved a final rule requiring the largest, most systemically important US bank holding companies to further strengthen their capital positions. Under the rule, a firm that is identified as a global systemically important bank (GSIB) holding company will have to hold additional capital “to increase its resiliency in light of the greater threat it poses to the financial stability of the United States.”
The final rule establishes the criteria for identifying a GSIB and the methods that those firms will use to calculate a risk-based capital surcharge, which is calibrated to each firm’s overall systemic risk. Eight US firms are currently expected to be identified as GSIBs under the final rule. “A key purpose of the capital surcharge is to require the firms themselves to bear the costs that their failure would impose on others,” Federal Reserve Board Chair Janet L. Yellen said. “In practice, this final rule will confront these firms with a choice: they must either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink their systemic footprint, reducing the harm that their failure would do to our financial system. Either outcome would enhance financial stability.”
Like the proposal issued in December 2014, the final rule requires GSIBs to calculate their surcharges under two methods and use the higher of the two surcharges. The first method is based on the framework agreed to by the Basel Committee on Banking Supervision and considers a GSIB’s size, interconnectedness, cross-jurisdictional activity, substitutability and complexity. The second method uses similar inputs, “but is calibrated to result in significantly higher surcharges and replaces substitutability with a measure of the firm’s reliance on short-term wholesale funding. As seen during the crisis, reliance on this type of funding left firms vulnerable to runs and fire.
The surcharges will be phased in in equal portions over the next four years, beginning on January 1, 2016, and becoming fully effective on January 1, 2019.
The final rule is available here.