Back to General Resources

Federal Reserve Meeting on GSIB Surcharge

 

Board
of Governors of the Federal Reserve System

Risk-Based
Capital Surcharges for Systemically Important Bank Holding Companies                              

Monday, July 20, 2015

Key
Topics & Takeaways

Unanimous Approval: The
Board of Governors voted unanimously to approve 1) regulatory capital rules
implementing risk-based capital surcharges for global systemically important
bank holding companies; and 2) the application of enhanced prudential standards
and reporting requirements to General Electric Capital Corporation.

GSIB Surcharge: Chair Yellen said that global
systemically important banks have the choice to either hold more capital or
shrink their systemic footprint and noted that this rule complements the Fed’s
enhanced prudential standards.

Surcharge as Part of CCAR: Governor Tarullo that the Fed will need to consider
“whether and how” to include the surcharge into the Fed’s stress testing and/or
its Comprehensive Capital Analysis and Review, saying the staff is assessing a
“wide range of possible changes” to these reviews.

International Standards: When asked by Governor
Fischer about international competitiveness concerns that arise due to higher
standards being imposed in the U.S., the Fed’s Van Der Weide said that U.S.
firms have been subject to regimes that are stricter than global standards on
the capital side and “have competed successfully.”

Meeting Participants

Chair
Yellen

Federal
Reserve Chair Janet Yellen explained that the final rule
under consideration would impose a risk-based capital surcharge on the largest
U.S. bank holding companies and requires these firms to bear the costs of their
own potential failures. She said that these banks have the choice to either
hold more capital or shrink their systemic footprint and noted that this rule
complements the Fed’s enhanced prudential standards.

Governor
Daniel Tarullo

Governor
Daniel Tarullo said that this rule, like the leverage ratio
rule, reflects the principle that stringency of regulations should vary with an
organization’s systemic footprint. He noted that the rule applies two methods
to calculate the surcharge, the first method being the same as that put forth
by the Basel Committee, and the second departing from the Basel framework by
measuring reliance on short term wholesale funding.

Tarullo
explained that, after analysis, Fed staff changed the score calculation under
the second method to be based on a fixed measure of systemic footprint, rather
than evaluating this relative to other organizations. He also said that the Fed
will need to consider “whether and how” to include the surcharge into the Fed’s
stress testing and/or its Comprehensive Capital Analysis and Review, saying the
staff is assessing a “wide range of possible changes” to these reviews.

Staff Presentation – Risk Based Capital Surcharges

Holly
Taylor, Division of Banking Supervision and Regulation,
noted that the surcharge is only applicable to organizations subject to the
provisions of Section 165 of the Dodd-Frank Act and thus does not apply to
small and community banks. She explained that the rule is an expansion of the
Fed’s capital conservation buffer and would be phased in beginning in 2016
through year end of 2018.

Taylor
noted that calculations of systemic significance were changed to be a fixed
rate, because under the previous approach, where measurements were relative to
other organizations, firms could make changes but still not see relief if all
the other organizations also made changes to reduce their footprints. She said
this would provide for greater predictability on the application of the
surcharge.

Taylor
then explained that foreign exchange conversion calculations would be done
using a one-time conversation using an average of foreign exchange rates to
allow changes in rates to be reflected in the surcharge requirements.

Jordan
Bleicher, Division of Banking Supervision and Regulation,
noted that liabilities are broken into categories and weighted in a similar
manner as done under the liquidity coverage ratio, and said short term
wholesale funding was included because the surcharge should increase with an
increased impact on financial stability.  He then explained that the
maximum risk weight for wholesale deposits decreased from 50 to 25 percent and
weights for financial clients dropped from 100 to 75 percent.

Bleicher
noted that the staff produced a White Paper to supplement the discussion of
surcharge calibration, noting that the paper uses 30 years of historical data
and concluded that the surcharge is “consistent with the impact theory,” and
that the surcharge should increase where there is increased impact on financial
stability.

Question and Answer

Chair
Yellen

Yellen
asked how the “loss given default” is calculated. Staff replied that the loss
given default scores are “taken into account in a qualitative way” in the White
Paper.

Governor
Fischer

Governor
Stanley Fischer asked if the Fed received “push back” on the inclusion of short
term wholesale funding, to which Gibson noted that some commentators said
inclusion was “not necessary.”

Fischer
asked if the U.S. has higher requirements than other countries and if this will
make it harder for U.S. firms to compete. Mark Van Der Weide,
Deputy Director, Division of Banking Supervision and Regulation, said that
the Fed tried to address the impact on the U.S. financial system and not
compare the U.S. to other jurisdictions. He added that other countries, such as
Sweden and Switzerland, have also gone beyond the Basel level and said that
U.S. firms have been subject to stricter regimes on the capital side and “have
competed successfully.”

Fischer
then asked about the use of exchange rates. Gibson said that if exchange rates
change over long periods of time, the surcharge will take account of it by
using a three year average, noting that short term rates are subject to
fluctuations that may not reflect the overall trend.

Fischer
asked if firms’ cross-border activities are taken into account, to which Gibson
said that cross-border activity is one of the indicators of systemic footprint
and thus leads to a higher surcharge.

Governor
Tarullo

Tarullo
asked why changes to the exchange rate calculation were made under the second
method and not the first method. Gibson said the first method was not changed
so that it would be more consistent with Basel and noting that the first method
acts as a floor for the surcharge.

Governor
Powell

Governor
Jerome Powell asked if firms are in a position to make decisions about their
business model on the appropriate and fastest way to reduce their systemic
footprint. Van Der Weide said that the rules are very transparent to the firms
and the public and that they will force firms to internalize costs. He added
that firms are given the choice of complying with tougher regulations or
shrinking their footprint, noting that some firms have economies of scale where
the benefits outweigh the higher costs.

Governor
Brainard

Governor
Lael Brainard supported the rule, saying it requires a substantial stack of
common equity to be held to internalize the risks of failure to the financial
system. She added that she looks forward to discussion on the role of capital
in stress tests.

Unanimous Approval

The
Board of Governors voted unanimously to approve the regulatory capital rules
implementing risk-based capital surcharges for global systemically important
bank holding companies.

Opening Remarks –General Electric Capital Corporation

Yellen
explained that the Fed’s order would require GE to comply with many of the same
standards applied to bank holding companies, but noted that in light of GE’s
plans to divest and shrink its footprint, the order is tailored to address
their activity in two phases.

Tarullo
noted that it is possible that GE will “remain designated for some time to
come” but said the order considers GE’s decision to reduce its size by 70
percent. He added that if GE is de-designated, then the full set of standards
will never take effect.

Gibson
said that many of GE’s activities are “quite similar” to those of bank holding
companies and that the order requires GE to hold more capital and liquidity.

Elizabeth
MacDonald, Senior Supervisory Financial Analyst in the Division of Capital and
Supervision,
said that the order, consistent with Dodd-Frank, requires a supplemental
leverage ratio tailored to the activities and size of an organization. She
explained that compliance with the order would be required by January 1, 2018,
and that it would require a majority of the board of directors to be
independent and unaffiliated with management, and require the entire risk board
to be independent. The order also places restrictions on the transactions with
affiliated entities, she explained, to address potential conflicts of interest.

Question and Answer

Fischer
asked how progress of divestiture will be monitored. Joyti Kohli,
Senior Supervisory Analyst, noted that an outside supervision team will be
monitoring GE’s divestiture plan, lines of control, business lines, asset
sales, and legal actions at all times. Gibson added that it is up to the
Financial Stability Oversight Council (FSOC) to determine if GE’s efforts to
shrink its activities merit a de-designation. 

Tarullo
noted the importance of the notice and comment period to tailor the standards
for GE and said that this framework is one the Fed will continue to pursue for
other non-bank designated organizations.

Unanimous Approval

The
Board of Governors voted unanimously to approve the application of enhanced
prudential standards and reporting requirements to General Electric Capital
Corporation.

 

For
more information on this meeting please click here.