Regulatory Capital Surcharge for Global Systemically Important Banks

H. Rodgin Cohen is partner and senior chairman, and Mark Welshimer is deputy managing partner of the Financial Institutions Group, at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell LLP publication.

On July 19, 2011, the Basel Committee on Banking Supervision (the “BCBS”) [1] issued a consultative document setting forth a requirement for a new common equity capital surcharge on certain global systemically important banks (“G-SIBs”). [2] A summary of the surcharge proposal was announced on June 25, 2010 in a short press release by the Group of Governors and Heads of Supervision of the BCBS. [3] The July 29 consultative document now describes the proposal in significantly more detail. The main elements of the surcharge proposal are as follows:

  • G-SIBs would be subject to an additional progressive Common Equity Tier 1 (“CET1”) surcharge, referred to in the consultative document as a “loss absorbency requirement” ranging from 1% to 3.5% over the Basel III 7% CET1 requirement.
  • The exact amount of the surcharge depends on a bank’s placement in one of five “buckets” (requiring a 1%, 1.5%, 2%, 2.5% and 3.5% surcharge, respectively) based on the bank’s global systemic importance under the proposal’s methodology.

  • To determine the level of the surcharge – that is which G-SIB bucket, if any, a bank is placed into – the proposal relies predominantly on a quantitative “indicator-based approach” comprised of five broad categories: cross-jurisdictional activity; size; interconnectedness; substitutability; and complexity.
  • The results of the indicator-based approach may be adjusted, to a limited extent and in rare circumstances, to reflect supervisory judgment.
  • The surcharge requirement will be phased in with the Basel III capital conservation and countercyclical buffers, beginning in January 1, 2016 and becoming fully effective on January 1, 2019.
  • The proposal contemplates that the top bucket requiring the highest 3.5% surcharge will initially be empty in order to provide a disincentive for G-SIBs to increase materially their global systemic importance in the future.
  • Under the proposal, final decisions concerning the applicability and implementation of the surcharge in general and with respect to particular institutions are no longer to be left to national supervisory authorities but are to be made jointly at an international level by the Financial Stability Board (the “FSB”) [4] and national authorities, in consultation with the BCBS.

Initially, all G-SIBs will be selected from the group of 73 major international banks from which the BCBS collected data in January, 2011 (the “BCBS Bank Sample”); under the BCBS’s current application of the proposal’s methodology, 28 banks would be designated as G-SIBs requiring a capital surcharge – that is, fall into one of the five buckets based on the results of the quantitative indicator-based approach. The consultative document, however, does not explicitly name such banks (and therefore does not describe which bucket they would be assigned under the proposal’s methodology), or provide the quantitative cutoff scores of the indicator-based approach which would lead a bank institution to be assigned into one of the particular buckets.

In addition, the surcharge proposal contemplates eventually expanding the surcharge methodology to a wider group of systemically important financial institutions, including financial market infrastructures, insurance companies, and other non-bank financial institutions that are not part of a banking group structure.

The press release accompanying the consultative document on the surcharge proposal requests that any comments on the surcharge proposal be submitted by August 26, 2011.


[1] The BCBS is a committee of banking supervisory authorities which was established by the central bank governors of the Group of Ten countries at the end of 1974. On December 15, 2010, the BCBS released the final revised framework for strengthening international capital and liquidity regulation, officially identified by the Basel Committee as “Basel III” and set forth in two documents: Basel III: A global regulatory framework for more resilient banks and banking systems and Basel III: International framework for liquidity risk measurement, standards and monitoring. See S&C’s memo to clients, dated December 31, 2010, titled “Basel III Capital and Liquidity Framework: Basel Committee Issues Final Revisions to International Regulation of Bank Capital and Liquidity.
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[2] BCBS, “Global systemically important banks: Assessment methodology and the additional loss absorbency requirement”, July 19, 2011.
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[3] Group of Governors and Heads of Supervision of the BCBS, “Measures for global systemically important banks agreed by the Group of Governors and Heads of Supervision”, June 25, 2011. See S&C’s memo to clients, dated June 25, 2011 titled “Bank Capital Requirements; Regulatory Surcharge for Global Systemically Important Banks”.
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[4] The FSB was established in April 2009 by the G-20 as the successor to the Financial Stability Forum founded in 1999 by the G-7 Finance Ministers.
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