This month, the Federal Reserve Board (FRB) issued a long-awaited proposal to impose additional capital requirements on the US’s global systemically important banks (G-SIBs). The proposal generally implements the Basel Committee’s G-SIB capital surcharge framework, but alters Basel's calculation methodology to factor in the G-SIB's reliance on short-term wholesale funding.
We expect the FRB to finalize its proposal in 2015, which would result in significantly higher CET1 capital surcharges for US G-SIBs (between 1 and 4.5%), as compared with Basel's framework (between 1 and 2.5%). Moreover, the heightened surcharge would be combined and phased-in between 2016 and 2019 with the capital conservation buffer (requiring another 2.5% CET1 when fully phased-in) and countercyclical buffer (requiring another up to 2.5% CET1), creating a costly cumulative hurdle for US G-SIBs that could impact bank lending and economic growth.
The cumulative effect could mean that by January 2019, some US G-SIBs will be subject to a CET1 requirement of up to 14% (nearly three times today’s required minimum). Furthermore, 2015 will bring two additional capital proposals by US regulators: implementation of Total Loss Absorbency Capacity and the long-awaited final single counterparty credit limits.
This Regulatory Brief analyzes the FRB’s proposed G-SIB surcharge, and assesses its impact in the context of other upcoming capital requirements.