Fed’s Final G-SIB Surcharge Rule

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Roozbeh Alavi, Lance Auer, and Kevin Clarke.

On July 20th, the Federal Reserve Board (FRB) finalized its capital surcharge rule for the eight US global systemically important banks (G-SIBs). [1] The rule (which was proposed last December), implements the Basel Committee on Banking Supervision’s (BCBS) related standard in the US, but adds a second US-specific methodology that incorporates a charge against a G-SIB’s reliance on short-term wholesale funding (STWF). Under the final rule, a US G-SIB’s surcharge would be set as the higher number calculated under the BCBS methodology and under the US-specific methodology incorporating STWF. The surcharge will be phased in over three years (in 25% increments) beginning January 1, 2016. Along with the capital conservation buffer, the G-SIB surcharge sets a new risk-based capital bar for US G-SIBs. [2]

1. US G-SIBs remain subject to significantly higher surcharges than their global peers. As was the case under the proposed version of the rule, US G-SIBs are subject to surcharges ranging from 1 to 4.5%, as opposed to the BCBS’s 1 to 2.5% range (see Table 1 in the Appendix). The FRB appears well aware of the industry’s concerns regarding the impact of this disparity on US banks’ competitiveness. When the issue was raised during the FRB’s meeting finalizing the rule, FRB staff pointed out that US banks have competed successfully against their foreign peers in the past few decades despite being subject to a stricter regulatory regime and that other G-SIB home countries are moving toward requirements that similarly exceed BCBS’s. Furthermore, in the long run, it is likely that the market itself will mitigate this disparity by its preference for transacting with better capitalized counterparties.

2. The surcharges are nevertheless manageable. Despite the stringency of the final rule, capital levels at seven of the eight US G-SIBs currently meet both the US-specific and BCBS surcharges on a fully phased-in basis (see Table 2 in the Appendix). The one exception, JPMorgan Chase, is expected to meet the requirement by the end of the three year phase-in period (i.e., by January 1, 2019), if not much sooner. This however does not necessarily negate the pain for banks, as they likely need to further increase their capital levels to maintain their current capital cushion above minimum regulatory capital requirements. [3]

3. Changes to the US-specific approach present some limited good news for US G-SIBs. The US proposal followed the BCBS’s framework in calculating a US G-SIB’s systemic footprint by comparing the G-SIB’s score across five categories to an aggregate score for each category of the 75 largest global banks (as determined by the BCBS). [4] The final rule improves upon the proposed rule’s methodology for the US-specific approach (but not the BCBS approach) mainly in two ways. First, the final rule uses a two-year average of global aggregate scores rather than the BCBS’s single year aggregates. Second, the final rule converts global aggregate amounts to US dollars using the average exchange rate over a three-year period, instead of the proposal’s daily spot rate. Together these changes result in more stable results, as they dampen the impact of year-over-year fluctuations in systemic footprint (compared to peer institutions) and exchange rate volatility. The fact that these changes did not result in a re-proposal of the US-specific portion of the rule suggests that the FRB views the adjustments to be of limited impact. [5]

4. The final rule brings better news for smaller banks. The proposal required each US bank with $50 billion or more in total consolidated assets to determine whether it was a G-SIB, based on an annual calculation. The final rule raises this floor to $250 billion or more [6] (i.e., only Advanced Approaches banks). While this increase does not change the ranks of US G-SIBs, it relieves smaller banks from unnecessary regulatory burden, a concern consistently raised by Congress during hearings over the past year.

5. The G-SIB surcharge is not incorporated into stress testing, for now. As part of the proposal, the FRB contemplated incorporating (via a separate rulemaking) all or a portion of the G-SIB surcharge to post-stress capital ratios under Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Testing (DFAST). The final rule leaves the issue open, stating that the FRB continues to consider the possibility. Either way, the earliest that the G-SIB surcharge could be incorporated into stress testing would be in 2017, as recently stated by the FRB. [7]


[1] The US G-SIBs are Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, and Wells Fargo.
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[2] For a detailed analysis of the proposal in the context of other G-SIB capital requirements, see PwC’s Regulatory brief, G-SIB capital: A look to 2015 (December 2014) (discussed on the Forum here).
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[3] See PwC’s Regulatory brief cited in note 2 (discussed on the Forum here) for a deeper analysis of the full range of G-SIB regulatory capital requirements.
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[4] Under the BCBS approach, the systemic footprint is determined based on its size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity. The US-specific approach utilizes the same criteria but replaces substitutability with a measure based on the bank’s reliance on short-term wholesale funding.
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[5] Other changes to the US-specific portion of the rule include reducing the maximum weighting for wholesale deposits from nonfinancial clients from 50 percent to 25 percent, and reducing the maximum weight for other types of unsecured STWF from 100 percent to 75 percent.
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[6] Or $10 billion or more in on-balance sheet foreign assets.
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[7] The FRB proposal to modify capital planning and stress testing regulations (issued on July 17th) explicitly ruled out any further changes to CCAR and DFAST for the 2016 cycle.
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Table 1—US banks’ G-SIB surcharge under the final rule’s two calculation methodologies

G-SIB BCBS method* US-specific method (i.e., with STWF)** Increase
JPMC 2.5% 4.5% 2.0%
Citi 2.0% 3.5% 1.5%
BofA 1.5% 3.0% 1.5%
GS 1.5% 3.0% 1.5%
MS 1.5% 3.0% 1.5%
WF 1.0% 2.0% 1.0%
STT 1.0% 1.5% 0.5%
BNYM 1.0% 1.0% 0.0%
* BCBS estimate using 2013 year-end data** FRB estimate using 2014 year-end data

Table 2—US banks’ estimated CET1 surplus/shortage with fully phased-in G-SIB surcharge

CET1—required**(US-specific method) CET1 surplus/shortage
JPMC 10.2% 11.5% -1.3%
Citi 13.1% 10.5% 2.6%
BofA 12.3% 10.0% 2.3%
GS 12.2% 10.0% 2.2%
MS 12.6% 10.0% 2.6%
WF 11.0% 9.0% 2.0%
STT 12.5% 8.5% 4.0%
BNYM 11.2% 8.0% 3.2%
* Based on 2014 year-end data** Includes the 2.5% capital conservation buffer


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