[Federal Register Volume 80, Number 157 (Friday, August 14, 2015)]
[Rules and Regulations]
[Pages 49082-49116]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-18702]



[[Page 49081]]

Vol. 80

Friday,

No. 157

August 14, 2015

Part III





 Federal Reserve System





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12 CFR Parts 208 and 217





 Regulatory Capital Rules: Implementation of Risk-Based Capital 
Surcharges for Global Systemically Important Bank Holding Companies; 
Final Rule

  Federal Register / Vol. 80 , No. 157 / Friday, August 14, 2015 / 
Rules and Regulations  

[[Page 49082]]


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FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 217

[Regulations H and Q; Docket No. R-1505]
RIN 7100 AE-26


Regulatory Capital Rules: Implementation of Risk-Based Capital 
Surcharges for Global Systemically Important Bank Holding Companies

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board of Governors of the Federal Reserve System is 
adopting a final rule that establishes risk-based capital surcharges 
for the largest, most interconnected U.S.-based bank holding companies 
pursuant to section 165 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act. The final rule requires a U.S. top-tier bank 
holding company that is an advanced approaches institution to calculate 
a measure of its systemic importance. A bank holding company whose 
measure of systemic importance exceeds a defined threshold would be 
identified as a global systemically important bank holding company and 
would be subject to a risk-based capital surcharge (GSIB surcharge). 
The GSIB surcharge is phased in beginning on January 1, 2016, through 
year-end 2018, and becomes fully effective on January 1, 2019. The 
final rule also revises the terminology used to identify the bank 
holding companies subject to the enhanced supplementary leverage ratio 
standards to ensure consistency in the scope of application between the 
enhanced supplementary leverage ratio standards and the GSIB surcharge 
framework.

DATES: The final rule is effective December 1, 2015, except that 
amendatory instructions 2, 3, 6, 8, and 10 amending 12 CFR 208.41, 
208.43, 217.1, 217.2, and 217.11 are effective January 1, 2018.

FOR FURTHER INFORMATION CONTACT: Anna Lee Hewko, Deputy Associate 
Director, (202) 530-6260, Constance M. Horsley, Assistant Director, 
(202) 452-5239, Juan C. Climent, Manager, (202) 872-7526, Jordan 
Bleicher, Senior Supervisory Financial Analyst, (202) 973-6123, Holly 
Kirkpatrick Taylor, Supervisory Financial Analyst, (202) 452-2796, or 
Mark Savignac, Senior Financial Analyst, (202) 475-7606, Division of 
Banking Supervision and Regulation; or Laurie Schaffer, Associate 
General Counsel, (202) 452-2272, Christine Graham, Counsel, (202) 452-
3005, or Mark Buresh, Attorney, (202) 452-5270, Legal Division. Board 
of Governors of the Federal Reserve System, 20th and C Streets NW., 
Washington, DC 20551. For the hearing impaired only, Telecommunications 
Device for the Deaf (TDD) users may contact (202) 263-4869.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction
    A. The Dodd-Frank Act
    B. Overview of the Proposed Rule
    C. Integrated Set of Prudential Standards
    D. Interaction with the Global Framework
II. Description of the Final Rule
    A. Identification of a GSIB
    B. Source of Systemic Indicator Information
    C. Computing the Applicable GSIB Surcharge
    D. Augmentation of the Capital Conservation Buffer
    E. Implementation and Timing
III. Indicators of Global Systemic Risk
    A. Size
    B. Interconnectedness
    C. Substitutability
    D. Complexity
    E. Cross-jurisdictional Activity
    F. Use of Short-term Wholesale Funding
IV. Amendments to the FR Y-15
V. Modifications to Related Rules
VI. Regulatory Analysis
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act Analysis
    C. Plain Language

I. Introduction

A. The Dodd-Frank Act

    Section 165 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) directs the Board to establish enhanced 
prudential standards for bank holding companies with $50 billion or 
more in total consolidated assets and for nonbank financial companies 
that the Financial Stability Oversight Council (Council) has designated 
for supervision by the Board (nonbank financial companies supervised by 
the Board).\1\ These standards must include risk-based capital 
requirements as well as other enumerated standards. They must be more 
stringent than the standards applicable to other bank holding companies 
and to nonbank financial companies that do not present similar risks to 
U.S. financial stability.\2\ These standards must also increase in 
stringency based on several factors, including the size and risk 
characteristics of a company subject to the rule, and the Board must 
take into account the differences among bank holding companies and 
nonbank financial companies.\3\
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    \1\ See 12 U.S.C. 5365.
    \2\ See 12 U.S.C. 5365(a)(1)(A).
    \3\ See 12 U.S.C. 5365(a)(1)(B). Under section 165(a)(1)(B) of 
the Dodd-Frank Act, the enhanced prudential standards must increase 
in stringency based on the considerations listed in section 
165(b)(3).
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B. Overview of the Proposed Rule

    In December 2014, the Board invited public comment on a notice of 
proposed rulemaking (proposal) to identify global systemically 
important bank holding companies (GSIBs) and impose a risk-based 
capital surcharge on those institutions (GSIB surcharge).\4\ The 
proposal established a methodology to identify whether a U.S. top-tier 
bank holding company with total consolidated assets of $50 billion or 
more is a GSIB. The proposed methodology was based on five broad 
categories that are correlated with systemic importance--size, 
interconnectedness, cross-jurisdictional activity, substitutability, 
and complexity. A bank holding company would determine a score in each 
category based on its firm-specific systemic indicators within each 
category relative to aggregate global indicator amounts across other 
large, global banking organizations. Each category would be given a 20 
percent weighting in the calculation of a firm's aggregate systemic 
indicator score (together, the method 1 score). A bank holding company 
whose method 1 score exceeded a defined threshold would be identified 
as a GSIB.
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    \4\ 79 FR 75473 (December 18, 2014).
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    A firm identified as a GSIB would then calculate its GSIB surcharge 
under two methods and would be subject to the higher of the two. The 
first method was the same methodology for identifying a bank holding 
company as a GSIB (method 1). The second method was based on the same 
systemic indicator scores used in method 1, except that the 
substitutability score was replaced by a measure of the firm's use of 
short-term wholesale funding (method 2).\5\ Method 2 surcharges were 
calibrated to better address the risks posed by these firms to U.S. 
financial stability. The GSIB surcharge was added to a GSIB's capital 
conservation buffer for purposes of the regulatory capital rule.\6\ It 
would have been phased in beginning on January 1, 2016, through

[[Page 49083]]

year-end 2018, and become fully effective on January 1, 2019.
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    \5\ The fact that method 2 likely produced a higher surcharge 
than method 1 derives from the difference in the calibration of 
these two methods. To allow comparability between scores produced 
under method 1 and method 2, method 2 raw scores were doubled.
    \6\ See 12 CFR 217.11.
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    The Board received 21 public comments on the proposed rule from 
banking organizations, trade associations, public interest advocacy 
groups, and private individuals. Some commenters also met with Board 
staff to discuss the proposal.\7\ While some commenters expressed 
support for higher capital standards for the largest and most complex 
U.S. banking organizations, several commenters criticized specific 
aspects of the proposal. For instance, several commenters expressed 
concern regarding the calibration of the GSIB surcharges. Other 
commenters argued that the proposed calculation methodology would limit 
the ability of a firm to reduce its GSIB surcharge by reducing its 
systemic risk profile. In addition, several commenters provided views 
on the proposed measure of short-term wholesale funding.
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    \7\ Summaries of these meetings are available on the Board's 
public Web site.
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    As discussed in this preamble, the final rule adopts the proposed 
rule, with several adjustments that respond to commenters' concerns. 
The final rule maintains the proposed approach for calculating the 
method 1 score that is derived from an annual aggregation of the 75 
largest U.S. and foreign banking organizations (and any other banking 
organizations included in the sample total for that year), but improves 
the predictability of the method 2 score by fixing the aggregate 
measure of U.S. and foreign banking organizations. The final rule also 
adjusts elements of the short-term wholesale funding calculation in 
method 2 in light of commenters' concerns. In addition, the preamble 
further clarifies the calibration methodology, and the Board is 
releasing a white paper contemporaneously with the final rule that sets 
forth a detailed explanation of the calibration methodology.

C. Integrated Set of Prudential Standards

    The GSIB surcharge adopted in the final rule is one of several 
enhanced prudential standards that the Board has implemented under 
section 165 of the Dodd-Frank Act. Other enhanced standards include the 
resolution plan rule,\8\ the capital plan rule,\9\ the stress test 
rules,\10\ and the enhanced prudential standard rules.\11\ The 
integrated set of standards that the Board has adopted under section 
165 of the Dodd-Frank Act will result in a more stringent regulatory 
regime is designed to mitigate risks to U.S. financial stability, and 
include measures that increase the resiliency of these companies and 
reduce the impact on U.S. financial stability were these firms to fail.
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    \8\ 12 CFR part 243.
    \9\ 12 CFR 225.8.
    \10\ 12 CFR part 252.
    \11\ 12 CFR part 252.
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    The final rule works to mitigate the potential risk that the 
material financial distress or failure of a GSIB could pose to U.S. 
financial stability by increasing the stringency of capital standards 
for GSIBs, thereby increasing the resiliency of these firms. The final 
rule takes into consideration and reflects the nature, scope, size, 
scale, concentration, interconnectedness, and mix of the activities of 
each company, as directed by section 165 of the Dodd-Frank Act.\12\ 
These factors are reflected in the method 1 and method 2 scores, which 
use quantitative metrics to measure the impact of these factors on a 
firm's systemic impact. GSIB surcharges are established using these 
scores, and GSIBs with higher scores are subject to higher GSIB 
surcharges.
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    \12\ See 12 U.S.C. 5365(b)(3).
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    In addition to the factors listed above, section 165 of the Dodd-
Frank Act also requires the Board to consider the importance of the 
company as a source of credit for households; businesses; state 
governments; and low-income, minority, or underserved communities; and 
as a source of liquidity for the U.S. financial system. The GSIB 
surcharge increases the resiliency of the largest U.S. bank holding 
companies, enabling them to continue serving as financial 
intermediaries for the U.S. financial system and as sources of credit 
to households, businesses, state governments, and low-income, minority, 
or underserved communities during times of stress.
    Section 165 of the Dodd-Frank Act also directs the Board to 
consider the extent to which the company is already subject to 
supervision.\13\ The final rule applies enhanced capital standards at 
the consolidated bank holding company level, and does not directly 
apply any standards to functionally regulated subsidiaries. The Board 
consulted with the Council, which includes the primary regulators of 
the functionally regulated subsidiaries of bank holding companies, 
regarding the final rule.\14\ While bank holding companies are already 
subject to capital requirements, section 165 of the Dodd-Frank Act 
directs the Board to adopt enhanced risk-based capital standards that 
mitigate the systemic risk of these firms. For reasons discussed below, 
adopting a GSIB surcharge addresses the systemic risk of GSIBs by 
making these firms more resilient.
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    \13\ The Board is directed to take into consideration the extent 
to which a company is subject to supervision by the Federal banking 
agencies, the Securities and Exchange Commission, the Commodity 
Futures Trading Commission, or the state insurance regulators.
    \14\ See 12 U.S.C. 5365(b)(4).
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 D. Interaction with the Global Framework

    The final rule is aligned with global efforts to address the 
financial stability risks posed by the largest, most interconnected 
financial institutions. In 2011, the Basel Committee on Banking 
Supervision (BCBS) adopted a framework to identify global systemically 
important banking organizations and assess their systemic importance 
(BCBS framework).\15\ The BCBS applies its methodology and releases a 
list of global systemically important banking organizations on an 
annual basis.\16\
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    \15\ See ``Global systemically important banks: Assessment 
methodology and the additional loss absorbency requirement,'' 
available at http://www.bis.org/publ/bcbs207.htm. In July 2013, the 
BCBS published a revised BCBS document entitled, ``Global 
systemically important banks: Updated assessment methodology and the 
higher loss absorbency requirement,'' which provides certain 
revisions and clarifications to the initial framework (Revised BCBS 
Document). The document is available at http://www.bis.org/publ/bcbs255.htm.
    \16\ See http://www.bis.org/bcbs/gsib/gsibs_as_of_2014.htm.
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    The BCBS plans to review its framework, including its indicator-
based measurement approach and the threshold scores for identifying 
global systemically important banks, every three years in order to 
capture developments in the banking sector and any progress in methods 
and approaches for measuring systemic importance.\17\ The result of the 
first three-year review is scheduled to be published by November 
2017.\18\
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    \17\ See paragraph 39 of the Revised BCBS Document.
    \18\ See paragraph 62 of the Revised BCBS Document.
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II. Description of the Final Rule

    The following discussion provides a summary of the proposal, the 
comments received, and the Board's responses to those comments, 
including modifications made in the final rule. The discussion begins 
with the proposed methodology to identify bank holding companies that 
are GSIBs. It then describes the two methods used to calculate the GSIB 
surcharge, the justification for using short-term wholesale funding in 
method 2, and the justification for the GSIB calibration. Next, it 
provides detail on the role of the GSIB surcharge in the regulatory 
capital

[[Page 49084]]

framework and its implementation and timing. Last, it describes the 
categories that are used to measure systemic importance.

A. Identification of a GSIB

1. Scope of Application
    The proposal would have required a U.S.-based top-tier bank holding 
company with total consolidated assets of $50 billion or more to 
compute annually its method 1 score to determine whether it is a 
GSIB.\19\ The Board has decided to tailor the final rule and apply this 
annual calculation requirement only to U.S.-based top-tier bank holding 
companies that qualify as advanced approaches Board-regulated 
institutions (those with $250 billion or more in consolidated total 
assets or $10 billion or more in consolidated total on-balance-sheet 
foreign exposures).\20\ This revised approach reflects the view that 
firms that do not meet the definition of an advanced approaches bank 
holding company are less likely to pose systemic risk to U.S. financial 
stability than firms that meet the advanced approaches threshold.
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    \19\ The rule would not apply to a bank holding company that is 
either a consolidated subsidiary of another bank holding company or 
a consolidated subsidiary of a foreign banking organization.
    \20\ 12 CFR 217.100.
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    The proposal did not apply to nonbank financial companies 
supervised by the Board, but the Board requested comment on whether it 
would be appropriate to apply a GSIB surcharge to such companies. 
Commenters argued that the proposed framework would not be appropriate 
for U.S.-based insurance companies because it did not take into account 
the inherent differences between the banking and insurance industries 
or accurately capture systemic risk in the insurance sector. Commenters 
contended that section 165 of the Dodd-Frank Act requires that capital 
standards for nonbank financial companies supervised by the Board be 
tailored to their specific business models and argued that Congress 
reiterated its intent that capital standards be tailored through the 
passage of the Insurance Capital Standards Clarification Act of 
2014.\21\ They also argued that applying the GSIB framework to insurers 
would be inconsistent with international efforts to develop insurance-
specific prudential standards.
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    \21\ See Public Law, 128 Stat. 3017 (2014).
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    Consistent with the proposal, the final rule does not apply the 
GSIB framework to nonbank financial companies supervised by the Board. 
Following designation of a nonbank financial company for supervision by 
the Board, the Board intends to assess thoroughly the business model, 
capital structure, and risk profile of the designated company to 
determine how enhanced prudential standards should apply and, if 
appropriate, would tailor application of the standards by order or 
regulation to that nonbank financial company or to a category of 
nonbank financial companies. In evaluating whether additional policy 
measures may be appropriate for such firms, the Board intends to 
consider comments received on the proposal.
2. Methodology To Identify a Bank Holding Company as a GSIB
a. General Methodology
    To calculate its method 1 score under the proposal, a GSIB would 
have used five broad categories that are correlated with systemic 
importance--size, interconnectedness, cross-jurisdictional activity, 
substitutability, and complexity. Each of the categories received a 20 
percent weighting in the calculation of a firm's method 1 score. The 
proposal identified 12 systemic indicators that measure the firm's 
profile within these five categories, as set forth in Table 1 below.

                  Table 1--Proposed Systemic Indicators
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                                                             Indicator
            Category                 Systemic indicator      weight (%)
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Size............................  Total exposures........          20
Interconnectedness..............  Intra-financial system            6.67
                                   assets.
                                  Intra-financial system            6.67
                                   liabilities.
                                  Securities outstanding.           6.67
Substitutability................  Payments activity......           6.67
                                  Assets under custody...           6.67
                                  Underwritten                      6.67
                                   transactions in debt
                                   and equity markets.
Complexity......................  Notional amount of over-          6.67
                                   the-counter (OTC)
                                   derivatives.
                                  Trading and available-            6.67
                                   for-sale (AFS)
                                   securities.
                                  Level 3 assets.........           6.67
Cross-jurisdictional activity...  Cross-jurisdictional             10
                                   claims.
                                  Cross-jurisdictional             10
                                   liabilities.
    Total for 12 indicators       .......................         100
     across five categories:.
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    A bank holding company would have calculated a score for each 
systemic indicator by dividing its systemic indicator value by an 
aggregate global measure for that indicator. The resulting value for 
each systemic indicator would then have been multiplied by the 
prescribed weighting indicated in Table 1 above, and by 10,000 to 
reflect the result in basis points. A bank holding company would then 
sum the weighted values for the 12 systemic indicators to determine its 
method 1 score; however, the value of the substitutability indicator 
scores would be capped at 100.\22\ A bank holding company would have 
been identified as a GSIB if its method 1 score exceeded 130.
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    \22\ Scores would be rounded to the nearest basis point 
according to standard rounding rules for the purposes of assigning 
levels. That is, fractional amounts between zero and one-half would 
be rounded down to zero, while fractional amounts at or above one-
half would be rounded to one.
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    According to the Board's analysis across many potential metrics, 
there is a clear separation in systemic risk profiles between the eight 
U.S. top-tier bank holding companies that would be identified as GSIBs 
under the proposed methodology and other bank holding companies. Using 
the method 1 scores as a measure of systemic importance, there is a 
large drop-off between the eighth-highest score (146) and the ninth-
highest score (51).\23\ Drawing the cut-off

[[Page 49085]]

line within this target range is reasonable because firms with scores 
at or below 51 were much closer in size and complexity to financial 
firms that had previously been resolved in an orderly fashion than they 
were to the largest financial firms, which had scores between three and 
nine times as high and are significantly larger and more complex. The 
final rule sets the cut-off for identifying GSIBs at 130 in order to 
align the cut-off with international standards and facilitate 
comparability across jurisdictions.
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    \23\ These estimated scores may not reflect the actual scores of 
a given firm, and they will change over time as each firm's systemic 
footprint grows or shrinks. Unless otherwise specified in this 
preamble, estimated scores for method 1 were produced using 
indicator data reported by firms on the FR Y-15 as of December 31, 
2014, and global aggregate denominators reported by the Basel 
Committee on Banking Supervision as of December 31, 2013.
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    Several commenters expressed support for the systemic indicators 
used in the proposed method 1. For instance, one commenter suggested 
that the Board use the systemic indicator approach more broadly in 
determining the scope of application of prudential regulation (as 
opposed to simple asset- or activity-based thresholds). However, 
another commenter argued that the proposed method did not appear to be 
based on empirical analysis, and questioned the equal weight given to 
each category. Another commenter argued that the proposed weighting for 
``size'' overstates the importance of the category because other 
indicators are strongly correlated with size.
    The final rule adopts the proposed weights for method 1. The equal 
weighting of these factors reflects the fact that each of the factors 
contributes to the effect the failure of a firm will have on financial 
stability and the particular score a firm receives will depend on its 
unique circumstances relative to the group of firms as a whole. The 
Board intends to reassess the regime at regular intervals to ensure 
that equal weighting remains appropriate.
b. Relative Nature of the Aggregate Global Indicator Amount
    The proposal measured a bank holding company's systemic indicator 
score in proportion to the corresponding aggregate global indicator 
amount, defined as the annual dollar figure published by the Board that 
represents the sum of the systemic indicator scores of the 75 largest 
U.S. and foreign banking organizations (as measured by the BCBS) and 
any other banking organization that the BCBS includes in its sample 
total for that year. Because the proposed aggregate global indicator 
amounts were calculated on a yearly basis, a firm's scores would have 
reflected yearly changes to the systemic indicators of the aggregate 
amounts. Thus, it is described herein as the ``relative approach.'' The 
aggregate global indicator amounts were converted from euros to U.S. 
dollars using the single day conversion rate provided by the BCBS.\24\ 
The conversion rate was based on the prevailing exchange rate between 
euros and U.S. dollars on December 31 of the applicable year.
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    \24\ See paragraph 18 of the Revised BCBS Document.
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    Several commenters argued that the relative approach would limit 
the ability of a firm to reduce its GSIB surcharge by reducing its 
systemic risk profile because its systemic indicator scores would be 
measured relative to the systemic risk profile of other global banking 
organizations. If a banking organization reduced the value of a given 
indicator by the same percentage as other banking organizations 
included in the aggregate global indicator, the banking organization's 
systemic indicator scores would not be affected. Commenters suggested 
that the aggregate global indicator amounts be replaced with an 
empirically-supported absolute dollar amount or other fixed approach to 
ensure that reductions in indicators result in reductions in the 
systemic indicator scores. Similarly, several commenters suggested that 
the exchange rate used for converting aggregate global indicator 
amounts to U.S. dollars could overstate the systemic importance of U.S. 
GSIBs when the U.S. dollar is strong, despite having a very limited 
relationship or relevance to systemic importance. To moderate this 
effect, commenters suggested replacing the level of the exchange rate 
measured at a single point in time with a five-year rolling average 
exchange rate. Commenters also suggested that this change be discussed 
at the BCBS.
    Under the relative approach, any changes in a bank holding 
company's systemic indicator scores would have been driven by the bank 
holding company's systemic footprint relative to other global banking 
organizations and would have been less sensitive to background 
macroeconomic conditions, such as GDP growth. On the other hand, using 
a fixed approach would enable a GSIB to predict its potential future 
systemic indicator scores, better facilitating its ability to engage in 
capital planning. A fixed approach would also provide more certainty 
regarding the actions that the GSIB may be able to take to reduce its 
GSIB surcharge. Because the score would not be affected by the 
aggregate level of systemic indicators of other global firms, a given 
firm would be able to take actions to reduce its GSIB surcharge even if 
other firms were taking similar actions.
    The final rule retains the relative approach for method 1, but 
adopts a fixed approach for method 2, as described further below. As a 
result, a firm will be identified as a GSIB and will be subject to a 
floor on its GSIB surcharge using the relative approach. The relative 
measure is appropriate for these purposes because it is less sensitive 
to changes in broader economic conditions. The relative measure also 
promotes comparability across jurisdictions implementing the BCBS 
framework. The fixed measure is appropriate for method 2, as it is more 
sensitive to an individual firm's systemic risk profile, independent of 
its global peers. A bank holding company would better predict its 
potential future systemic indicator scores under a fixed approach, 
which would permit the firm to identify actions it may be able to take 
to reduce its GSIB surcharge. As the method 2 surcharge is likely to be 
the applicable surcharge, it better enables a firm to manage its risk 
profile.
    Scores calculated under the fixed approach could be influenced by 
factors unrelated to systemic risk such as general economic growth. 
Method 2 does not include an automatic mechanism to adjust for such 
potential effects in order to avoid unintended consequences.\25\ Under 
the final rule, the scores depend on a range of different indicator 
variables, each of which measures a different aspect of systemic risk 
that exhibits its own specific behavior. It is unlikely that any simple 
and mechanical method for deflating the score can control for 
background movements in these indicators unrelated to systemic risk 
without affecting the resulting score's ability to measure each of 
these different aspects of systemic risk. The Board will periodically 
reevaluate the framework to ensure that factors unrelated to systemic 
risk do not have an unintended effect on a bank holding company's 
systemic indicator scores.
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    \25\ For example, under a fixed approach scores could 
potentially increase over time as a result of general economic 
growth as the economy expands. One way to address this effect could 
be to deflate scores by the rate of economic growth. However, such 
an approach could have the unintended consequence that scores would 
increase procyclically in the event of an economic contraction, 
thereby potentially raising capital surcharges in a way that could 
further exacerbate the economic downturn.
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    One commenter noted that it was unclear how the objective of 
measuring the risk that a U.S. banking organization poses to the 
stability of the U.S.

[[Page 49086]]

financial system would be accomplished by calculating its percentage of 
the aggregate global indicator amounts.
    The underlying assumption of this share-based approach is that the 
failure of a U.S. banking organization that makes up a significant 
proportion of the aggregate global indicator amounts under the systemic 
indicators would lead to a significant disruption of the U.S. financial 
system, as well as the global financial system.

B. Source of Systemic Indicator Information

    Under the proposal, to determine whether it is a GSIB, a bank 
holding company identified the values for each systemic indicator that 
it reported on its most recent Banking Organization Systemic Risk 
Report (FR Y-15).The FR Y-15 is an annual report that gathers data on 
components of systemic risk from large bank holding companies to enable 
analysis of the systemic risk profiles of such firms.\26\ The FR Y-15 
was developed to facilitate the implementation of the GSIB surcharge 
and also is used to analyze the systemic risk implications of proposed 
mergers and acquisitions and to monitor, on an ongoing basis, the 
systemic risk profiles of bank holding companies subject to enhanced 
prudential standards under section 165 of the Dodd-Frank Act. All U.S. 
top-tier bank holding companies with total consolidated assets of $50 
billion or more are required to file the FR Y-15 on an annual basis. 
The final rule relies on data collected on the FR Y-15, consistent with 
the proposal.
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    \26\ See 77 FR 76487 (December 28, 2012). The Board subsequently 
revised the FR Y-15 in December 2013. See 78 FR 77128 ( December 20, 
2013). On July 9, 2015, the board invited comment on a proposal to 
revise the FR Y-15. See 80 FR 39433. Among other changes, the 
reporting proposal would have collected information on short-term 
wholesale funding based on the Board's proposed rule to establish 
GSIB surcharges. In connection with this final rule, the Board is 
amending the proposed short-term wholesale funding collection, and 
extending the comment period on the proposal to end 60 days after 
this final rule is published in the Federal Register.
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    As noted above, the proposal measured each of a bank holding 
company's systemic indicator scores in proportion to the aggregate 
global indicator amount, defined as the annual dollar figure published 
by the Board that represents the sum of the systemic indicator scores 
of the 75 largest global banking organizations, as measured by the 
BCBS, and any other banking organization that the BCBS includes in its 
sample total for that year, converted into U.S. dollars and published 
by the Board. The 75 largest global banking organizations on which the 
aggregate global indicator amounts are based includes both U.S. and 
foreign banking organizations. As noted above, information from U.S. 
banking organizations is collected on the FR Y-15. Foreign 
jurisdictions collect information in connection with the GSIB surcharge 
framework developed by the BCBS that parallels the information 
collected on the FR Y-15. The aggregate global indicator amounts are 
denominated in euros and compiled and published by the BCBS on an 
annual basis along with foreign exchange rates.
    Some commenters suggested that the proposed aggregate global 
indicator amounts (the denominator of the systemic indicator scores) be 
expanded to include a broader set of financial institutions than what 
was included in the proposal. For instance, commenters suggested that 
the proposal expand the global aggregate indicator amounts to include 
additional non-GSIB U.S. banking organizations, central counterparties, 
and nonbank financial companies supervised by the Board. The purpose of 
the GSIB surcharge is to address the systemic risks posed by the most 
systemic U.S. banking organizations, and the relative score reflects 
the types of systemic risk specifically posed by banking organizations. 
The Board continues to consider the systemic risk posed by nonbank 
financial companies, which may pose different risks to U.S. financial 
stability. Accordingly, the final rule incorporates the aggregate 
global indicator amounts as proposed. When developing prudential 
standards, the Board will continue to take into account the specific 
characteristics and potential risks posed by different types of 
financial institutions, including those of nonbank financial 
institutions.
    Several commenters expressed concern with the proposed use of 
global data to compute the aggregate global indicator amounts. For 
instance, some commenters expressed the view that they were unable to 
evaluate the data collection process of foreign jurisdictions, and did 
not provide procedural and substantive safeguards. Commenters also 
expressed concern regarding the quality of the global data, suggesting 
that there may be inconsistencies between data reporting across 
jurisdictions and noting that foreign jurisdictions may not make their 
institutions' data public. Other commenters questioned the transparency 
and auditability of the measure and contended that it was unclear 
whether U.S. authorities would be able to audit the foreign data. 
Commenters also asked how restatements of data, if necessary, would 
flow into the denominator used to calculate a firm's systemic risk 
score. Commenters recommended that the Board delay finalizing the 
proposal until the method for calculating the aggregate global 
indicator amounts was clear and accessible to the public, and requested 
that the Board publish analysis on how instructions from other 
jurisdictions compares to U.S. instructions and that the Board make 
adjustments to U.S. rules if necessary.
    Use of global data in calculating the GSIB surcharge is 
appropriate. The proposal explained how the aggregate global indicator 
amounts released by the BCBS are calculated, including a table listing 
each systemic indicator that is reported by the largest global banking 
organizations. Moreover, the proposal described the population of 
global banking organizations that report the data. The methodology 
relies on a global data source that has been in place for a number of 
years and which is collected based on processes and procedures that are 
publicly available. Each year, the BCBS publishes on its Web site the 
reporting form used by banking organizations included in the global 
sample for the purpose of the GSIB designation exercise, as well as 
detailed instructions to avoid differences in interpretations across 
jurisdictions.
    Commenters also raised concerns regarding the quality of the global 
data. The BCBS has implemented data collection standards and auditing 
processes to ensure the quality, consistency, and transparency of the 
systemic indicator data reported by banking organizations across 
jurisdictions. The BCBS reporting instructions include standards for 
reporting the indicator totals and subcomponents, which require that 
firms have an internal process for checking and validating each 
item.\27\ Member supervisory authorities are responsible for ensuring 
that their banking organizations are reporting accurate data. Under the 
BCBS framework, it is expected that national supervisory authorities 
will require banking organizations included in the global sample to 
publicly disclose the 12 indicators used in the assessment methodology 
in order to increase transparency. National authorities also have 
discretion under the framework to require that banking organizations

[[Page 49087]]

disclose the full breakdown of the indicators as set out in the 
template, and many have opted to do so.\28\ Moreover, the reporting 
form includes automated checks, and the BCBS, in collaboration with 
Board and other national supervisory staff, conducts a review of the 
data to be included in the global systemic indicators to serve as a 
final check for data that has been misreported. This process also 
compares prior-year submissions to identify whether there is a material 
change in a reported figure. To the extent that a banking 
organization's submissions raise questions, the BCBS team goes back to 
the regulator of the banking organization, which consults with the 
company to verify the accuracy of the submission. To date, inspections 
have identified issues that have required firms to resubmit data and 
have led to updates in the aggregate global indicator amounts. The 
Federal Reserve will continue to participate in the global data 
collection process to help ensure the continuing quality of the global 
data used in the final rule.
---------------------------------------------------------------------------

    \27\ See the reporting instructions on the Bank for 
International Settlement's Web page ``Global systemically important 
banks: Assessment methodology and the additional loss absorbency 
requirement,'' available at http://www.bis.org/bcbs/gsib/.
    \28\ At least the following countries required their largest 
banking organizations to disclose the full breakdown of their end-
2013 indicators: Austria, Belgium, France, Italy, the Netherlands, 
Norway, Spain, Sweden, the United Kingdom, and the United States.
---------------------------------------------------------------------------

C. Computing the Applicable GSIB Surcharge

    Under the proposal, a bank holding company with an aggregate 
systemic indicator score of 130 basis points or greater would be 
identified as a GSIB and, as such, would be subject to the higher of 
the two surcharges calculated under method 1 and method 2.
1. Method 1 Surcharge
    As noted above, under the proposal, a bank holding company would 
have calculated its method 1 score using the same methodology used to 
determine whether the bank holding company was a GSIB. A bank holding 
company's method 1 score receives a surcharge in accordance with Table 
2, below.

                  Table 2--Proposed Method 1 Surcharge
------------------------------------------------------------------------
     Method 1 score (basis points)              Method 1 surcharge
------------------------------------------------------------------------
Less than 130..........................  0.0 percent (no surcharge).
130-229................................  1.0 percent.
230-329................................  1.5 percent.
330-429................................  2.0 percent.
430-529................................  2.5 percent.
530-629................................  3.5 percent.
630 or greater.........................  3.5 percent plus 1.0 percentage
                                          point for every 100 basis
                                          point increase in score.
------------------------------------------------------------------------

    As reflected in Table 2, a GSIB would have been subject to a 
minimum capital surcharge of 1.0 percent. The minimum surcharge of 1.0 
percent for all GSIBs accounts for the inability to know precisely 
where the cut-off line between a GSIB and a non-GSIB will be at the 
time failure occurs, and the purpose of the surcharge of enhancing 
resilience of all GSIBs. The surcharge increased in increments of 0.5 
percentage points for each 100 basis-point band, up to a method 1 
surcharge of 2.5 percent. If a GSIB's method 1 score exceeded 529, the 
GSIB would have been subject to a surcharge equal to 3.5 percent, plus 
1.0 percentage point for every 100 basis point increase in score. Using 
current data, the method 1 score of the largest U.S. GSIB is estimated 
to be within the 2.5 percent band. By increasing the surcharge by 1.0 
percentage point (instead of 0.5 percentage points), the proposed rule 
was designed to provide a disincentive to existing GSIBs to increase 
their systemic footprint.
    As discussed above, the Board received comments on the proposed 
method 1 categories, the weighting of the categories, the relative 
approach, and the calibration method. For the reasons discussed in 
other sections, the final rule adopts method 1 surcharges without 
change.
2. Method 2 Surcharge
    Under the proposed method 2, a GSIB would have calculated a score 
for the size, interconnectedness, complexity, and cross-jurisdictional 
activity systemic indicators in the same manner as it would have 
computed its aggregate systemic indicator score under method 1. Rather 
than using the method 1 substitutability category, under the proposed 
method 2, the GSIB would have used a quantitative measure of its use of 
short-term wholesale funding (short-term wholesale funding score). To 
determine its method 2 surcharge, a GSIB would have identified the 
method 2 surcharge that corresponds to its method 2 score, as 
identified in Table 3 below.

                       Table 3--Method 2 Surcharge
------------------------------------------------------------------------
     Method 2 score (basis points)              Method 2 surcharge
------------------------------------------------------------------------
Less than 130..........................  0.0 percent (no surcharge).
130-229................................  1.0 percent.
230-329................................  1.5 percent.
330-429................................  2.0 percent.
430-529................................  2.5 percent.
530-629................................  3.0 percent.
630-729................................  3.5 percent.
730-829................................  4.0 percent.
830-929................................  4.5 percent.
930-1029...............................  5.0 percent.
1030-1129..............................  5.5 percent.
1130 or greater........................  5.5 percent plus 0.5 percentage
                                          point for every 100 basis
                                          point increase in score.
------------------------------------------------------------------------

    As reflected in Table 3, a GSIB would have been subject to a 
minimum capital surcharge of 1.0 percent under method 2.\29\ Like the 
method 1 surcharge, the method 2 surcharge uses band ranges of 100 
basis points, with the lowest band ranging from 130 basis points to 229 
basis points. The method 2 surcharge increases in increments of 0.5 
percentage points per band, including bands at and above 1130 basis 
points. As with the method 1 surcharge, the method 2 surcharge includes 
an indefinite number of bands in order to give the Board the ability to 
assess an appropriate surcharge should a GSIB become significantly more 
systemically important.
---------------------------------------------------------------------------

    \29\ As noted above, the minimum surcharge of 1.0 percent for 
all GSIBs accounts for the inability to know precisely where the 
cut-off line between a GSIB and a non-GSIB will be at the time when 
a failure occurs, and the purpose of the surcharge of enhancing 
resilience of all GSIBs.
---------------------------------------------------------------------------

    As discussed above in section II.A.2.b of this preamble, the final 
rule adopts a fixed approach for converting a bank holding company's 
systemic indicator value into its method 2 score, instead of measuring 
the systemic indicator value as relative to an annual aggregate global 
indicators. The fixed approach used in method 2 employs constants, 
described immediately below, that are based on the average of the 
aggregate global indicator amounts for each indicator for year-end 2012 
to 2013.\30\ The aggregate global indicator amounts are converted from 
euros to U.S. dollars using an exchange rate equal to the average daily 
foreign exchange spot rates from the period 2011-2013, rounded to five

[[Page 49088]]

decimal places.\31\ In developing the fixed coefficients, the Board 
analyzed data covering several years and found that averaging a global 
measure of a given systemic indicator amount over at least two years 
reduced the impact of short-term fluctuations of the aggregate global 
indicator amount, while improving the predictability of the score 
calculation.\32\ To convert the global measure of a given systemic 
indicator amount to U.S. dollars, the final rule uses a three-year 
average exchange rate. A three-year average reduces potential 
volatility in the score that would be introduced by the volatility in 
daily spot-rates while reflecting more sustained changes in exchange 
rates.
---------------------------------------------------------------------------

    \30\ Note that there is no comparable data for trading and AFS 
securities due to a definitional change, so only the end-2013 value 
is used in the calculation.
    \31\ To determine the rounded foreign exchange conversion rate 
of 1.3350, the Board averaged the daily euro to U.S. dollar spot 
rates from 2011-2013 as published by the European Central Bank 
available at https://www.ecb.europa.eu/stats/exchange/eurofxref/html/index.en.html.
    \32\ The final rule chose a two year average, as there have not 
been dramatic fluctuations in the aggregate global indicator amounts 
over the last several years of available data (other than due to a 
definitional change for trading and AFS securities).
---------------------------------------------------------------------------

    The final rule assigns a constant, or coefficient, to each systemic 
indicator that includes the average aggregate global indicator amount, 
the indicator weight, the conversion to basis points, and doubling of 
firm scores. This reduces the steps that a GSIB must take to determine 
its method 2 score, as compared to the proposal. Presented in another 
manner, the method 2 indicator coefficients in the final rule are 
calculated as follows: \33\
---------------------------------------------------------------------------

    \33\ For example, the coefficient value for the size category is 
calculated as follows: 20 percent (indicator weight)/(67,736 billion 
EUR (average of 2012-2013 aggregate global indicator) * 1.3350 EUR/
USD) * 10,000 (conversion to bps) * 2, which is equivalent to the 
coefficient value of 4.423 percent in Table 4.

Indicator weight/(average aggregate global indicator(in EUR) 
* FX conversion rate(EUR to USD)) * 10,000 (conversion to 
---------------------------------------------------------------------------
basis points) * 2

    These coefficients are set forth in Table 4, below:

       Table 4--Coefficients for Method 2 Systemic Indicators \34\
------------------------------------------------------------------------
                                                            Coefficient
            Category                Systemic indicator       value (%)
------------------------------------------------------------------------
Size...........................  Total exposures........           4.423
Interconnectedness.............  Intra-financial system           12.007
                                  assets.
                                 Intra-financial system           12.490
                                  liabilities.
                                 Securities outstanding.           9.056
Complexity.....................  Notional amount of over-          0.155
                                  the-counter (OTC)
                                  derivatives.
                                 Trading and available-           30.169
                                  for-sale (AFS)
                                  securities.
                                 Level 3 assets.........         161.177
Cross-jurisdictional activity..  Cross-jurisdictional              9.277
                                  claims.
                                 Cross-jurisdictional              9.926
                                  liabilities.
------------------------------------------------------------------------

    Use of a fixed approach improves the predictability of the scores 
and facilitates capital planning by GSIBs. It will also permit firms to 
calculate their method 2 scores as soon as they calculate their 
systemic indicator values, and not depend on publication of aggregate 
global figures as was the case under the proposal.
---------------------------------------------------------------------------

    \34\ The final rule presents the coefficients using five decimal 
places based on a review of the estimated scores of the largest five 
bank holding companies. Increasing the number of decimal places 
would have an immaterial difference on the systemic indicator scores 
of bank holding companies.
---------------------------------------------------------------------------

    While the final rule's method 2 score has the advantages set forth 
above, the Board acknowledges that over time, a bank holding company's 
method 2 score may be affected by economic growth that does not 
represent an increase in systemic risk. To ensure changes in economic 
growth do not unduly affect firms' systemic risk scores, the Board will 
periodically review the coefficients and make adjustments as 
appropriate.
3. Short-Term Wholesale Funding
    The proposed method 2 incorporated a measure of short-term 
wholesale funding in place of substitutability in order to address the 
risks presented by those funding sources. During periods of stress, 
reliance on short-term wholesale funding can leave firms vulnerable to 
runs that undermine financial stability. When short-term creditors lose 
confidence in a firm or believe other short-term creditors may lose 
confidence in that firm, those creditors have a strong incentive to 
withdraw funding quickly before withdrawals by other creditors drain 
the firm of its liquid assets. To meet its obligations, the borrowing 
firm may be required to rapidly sell less liquid assets, which it may 
be able to do only at fire sale prices that deplete the seller's 
capital and drive down asset prices across the market. Asset fire sales 
may also occur in a post-default scenario, as a defaulted firm's 
creditors seize and rapidly liquidate assets the defaulted firm has 
posted as collateral. These fire sales can result in externalities that 
spread financial distress among firms as a result of counterparty 
relationships or because of perceived similarities among firms, forcing 
other firms to rapidly liquidate assets in a manner that places the 
financial system under significant stress.
    Several commenters expressed support for the inclusion of a short-
term wholesale funding measure, claiming that short-term wholesale 
funding is more correlated to probability of failure than 
substitutability and that the proposal provides appropriate incentives 
to firms to reduce use of short-term wholesale funding. Other 
commenters objected to the inclusion of short-term wholesale funding in 
the GSIB surcharge, pointing to other regulatory initiatives that 
address liquidity concerns, such as the liquidity coverage ratio (LCR). 
Several commenters argued that the liquidity framework should be 
implemented before short-term wholesale funding is included as part of 
the GSIB surcharge. Another commenter expressed the view that capital 
is an ineffective tool to stem contagious runs because no reasonable 
amount of capital would be able to absorb mounting losses resulting 
from run-driven asset fire sales.
    The final rule includes a short-term wholesale funding component 
because use of short-term wholesale funding is a key determinant of the 
impact of a firm's failure on U.S. financial stability. Increasing 
capital is an effective tool to reduce the risk of liquidity runs 
because capital helps maintain confidence in the firm among its 
creditors and counterparties. In addition, if runs do occur, additional 
capital buffers will increase the probability that the firm

[[Page 49089]]

will be able to absorb losses without failing.
    Furthermore, other liquidity measures, such as the LCR, do not 
fully address the systemic risks of short-term wholesale funding. The 
LCR generally permits the outflows from such liabilities to be offset 
using either high quality liquid assets or the inflows from short-term 
claims with a matching maturity. In cases where a firm uses short-term 
wholesale funding to fund a short-term loan, a run by the firm's short-
term creditors could force the firm to quickly reduce the amount of 
credit it extends to its clients or counterparties. Those 
counterparties could then be forced to rapidly liquidate assets, 
including relatively illiquid assets, which might give rise to a fire 
sale.\35\ Because the GSIB surcharge focuses only on a bank holding 
company's use of short-term wholesale funding and does not take into 
account the inflows, it complements the liquidity requirements imposed 
by the LCR.
---------------------------------------------------------------------------

    \35\ The risk described here is similar to the risk associated 
with matched books of securities financing transactions, which is 
discussed in http://www.federalreserve.gov/newsevents/speech/tarullo20131122a.htm.
---------------------------------------------------------------------------

    One commenter argued that the proposal did not explain why the 
short-term wholesale funding indicator should replace the 
substitutability category rather than any of the other categories. As 
noted in the proposal, substitutability is relevant in determining 
whether a bank holding company is a GSIB, as the failure of a bank 
holding company that performs a critical function can pose significant 
risks to U.S. financial stability. However, use of short-term wholesale 
funding is a key determinant of the systemic losses resulting from a 
firm's failure.\36\ As the GSIB surcharge is calibrated to equate the 
systemic loss of a GSIB's failure to the failure of a large non-GSIB, 
it is appropriate to replace the measures of substitutability with a 
measure of short-term wholesale funding.
---------------------------------------------------------------------------

    \36\ Id.
---------------------------------------------------------------------------

    One commenter contended that the Board should conduct a more 
structured data collection in relation to short-term wholesale funding 
to ensure dynamic monitoring and regulation of short-term wholesale 
funding activities by GSIBs and appropriate tailoring of regulatory 
regimes based on trends in these markets. Consistent with the 
commenter's suggestion, the Board invited comment on a proposal to 
collect information regarding a bank holding company's short-term 
wholesale funding sources on July 9, 2015.\37\ In connection with this 
final rule, the Board is amending the proposed FR Y-15 collection in 
order to align the definition of short-term wholesale funding with the 
definition contained in the final rule. Comments on these amendments 
will be due 60 days after publication of the final rule in the Federal 
Register.
---------------------------------------------------------------------------

    \37\ See 80 FR 39433.
---------------------------------------------------------------------------

4. Calibration of GSIB Surcharge and Estimated Impact
    As described in the proposal, the calibration of the GSIB surcharge 
was based on the Board's analysis of the additional capital necessary 
to equalize the expected impact on the stability of the financial 
system of the failure of a GSIB with the expected systemic impact of 
the failure of a large bank holding company that is not a GSIB 
(expected impact approach). Increased capital at a GSIB increases the 
firm's resiliency, thereby reducing its probability of failure and 
resulting in reduced expected systemic impact.
    Some commenters expressed support for the proposed expected impact 
approach, suggesting that the approach would reduce the GSIBs' risk of 
failure and provide incentives for firms to restructure and reduce 
their systemic footprint. However, several commenters were critical of 
the expected impact approach as outlined in the proposal. Several 
commenters argued that the proposal did not include underlying 
empirical analysis to support the surcharge levels and argued that it 
was not possible to judge whether the proposal achieves its underlying 
aims. Further, commenters argued that the underlying analysis should be 
made public and the public given an opportunity to comment on that 
analysis.
    Section 165 of the Dodd-Frank Act directs the Board to impose 
enhanced prudential standards that prevent or mitigate risks to the 
financial stability of the United States that could arise from the 
material financial distress or failure of large, interconnected 
financial institutions. Because the failure of a GSIB may pose 
significant risk to U.S. financial stability, regulations under section 
165 of the Dodd-Frank Act should be designed to lower the probability 
of default of such firms. One method of lowering the probability of 
default of a financial firm is to impose additional capital 
requirements on that firm. Imposing the GSIB surcharge on only the 
largest, most interconnected financial firms--the GSIBs--is consistent 
with the direction in section 165 of the Dodd-Frank Act that prudential 
standards be tailored and take into consideration capital structure, 
riskiness, complexity, financial activities, size, and other risk-
related factors.
    In connection with this final rule, the Board has benefitted from 
the information, suggestions, and analysis provided by commenters. To 
help explain how the Board has analyzed this and other information 
available to it, the Board is publishing with this rule a white paper 
that supplements the calibration outlined in the final rule and the 
rationale for the surcharge levels that apply under the rule.\38\ The 
white paper expands on the expected impact approach described in the 
proposed rule, describes the assumptions necessary to that approach, 
and helps explain the assumptions underlying and the analytical 
framework supporting the final rule. The Board has incorporated that 
analysis in its consideration and is publishing the white paper to make 
it more accessible to the public.
---------------------------------------------------------------------------

    \38\ See Calibration of the GSIB Surcharge. The Board relied on 
the white paper and its explanations and analysis in this rulemaking 
and incorporates it by reference.
---------------------------------------------------------------------------

    As discussed more fully in the white paper, under the expected 
impact approach, the GSIB surcharge is calibrated to reduce the 
expected impact of a GSIB's failure to equal that of a large banking 
organization that is not a GSIB, which the white paper refers to as the 
``reference BHC'' (r). In terms of systemic loss given default (LGD), 
probability of default (PD), and expected systemic loss from default 
(EL), this approach is expressed symbolically as follows:

EL GSIB = ELr,

where:

EL = LGD * PD

    Since LGDGSIB is (by the definition of GSIB) greater 
than LGDr, satisfying the equation requires PDGSIB to be 
reduced below PDr. For example, if a given GSIB's loss given default is 
twice as great as that associated with the reference BHC, then that 
GSIB's probability of default must be reduced to half of the reference 
BHC's probability of default. This rule achieves that goal by 
subjecting the GSIB to a capital surcharge, since a larger capital 
buffer allows a firm to absorb a larger amount of losses without 
failing.
    Several components are necessary to operationalize the expected 
impact framework: A metric for quantifying a BHC's systemic loss given 
default (that is, its systemic footprint); a reference BHC with an LGD 
score that can be compared to the scores of the GSIBs; and a function 
for evaluating the

[[Page 49090]]

amount of additional capital that is necessary to cut a BHC's 
probability of default by a desired fraction.
    The white paper quantifies firms' systemic loss given default using 
the final rule's method 1 and method 2. It also discusses several 
plausible choices of reference BHC and the scores associated with those 
choices under each of the two methods. The expected impact framework 
requires that the reference BHC be a non-GSIB, but it leaves room for 
discretion as to the reference BHC's identity and LGD score. The white 
paper explores several options for choosing a reference BHC and the 
surcharges that stem from these options. The reference BHC choices 
considered are (1) a representative bank holding company with $50 
billion in total assets (a threshold used by section 165 of the Dodd-
Frank Act to determine which bank holding companies should be subjected 
to enhanced prudential standards in order to promote financial 
stability); (2) a representative BHC with $250 billion in total assets 
(a threshold used by the Board to identify advanced approaches bank 
holding companies); (3) the actual U.S. non-GSIB with the highest score 
under each method (that is, the most systemically important U.S. bank 
holding company that is not a GSIB); and (4) a hypothetical bank 
holding company with a score somewhere in between the score of the most 
systemic U.S. non-GSIB and the score of the least systemic GSIB.
    Within option 4, the white paper identifies a hypothetical bank 
holding company with a score between the score of the least systemic 
GSIB and the score of the most systemic U.S. non-GSIB for both method 1 
and method 2. For each method, the Board considered where the range 
between the lowest scoring GSIB and a highest scoring non-GSIB would 
lie, and considered several options for a cut-off line within the 
target range. For method 1, that gap lies between the bank holding 
company with the eighth-highest score (146), and the bank holding 
company with the ninth-highest score (51).\39\ As discussed in the 
white paper, drawing the cut-off line within this target range is 
reasonable because firms with scores at or below 51 were much closer in 
size and complexity to financial firms that have previously been 
resolved in an orderly fashion than they were to the largest financial 
firms, which had scores between three and nine times as high and are 
significantly larger and more complex.
---------------------------------------------------------------------------

    \39\ These estimated scores may not reflect the actual scores of 
a given firm, and they will change over time as each firm's systemic 
footprint grows or shrinks. Estimated scores for method 1 were 
produced using indicator data reported by firms on the FR Y-15 as of 
December 31, 2014, and global aggregate denominators reported by the 
Basel Committee on Banking Supervision as of December 31, 2013. 
Estimated scores for method 2 were produced using the same indicator 
data and the average of the global aggregate denominators reported 
by the BCBS as of the ends of 2012 and 2013. For the eight U.S. BHCs 
with the highest scores, the short-term wholesale funding component 
of method 2 was estimated using liquidity data collected through the 
supervisory process and averaged across 2014.
---------------------------------------------------------------------------

    The Board has chosen a cut-off line of 130 for method 1, which is 
at the upper end of the target range. This choice is appropriate 
because it aligns with international standards and facilitates 
comparability among jurisdictions.
    For method 2, the white paper identifies the gap between Bank of 
New York Mellon and the next-highest-scoring firm as the most rational 
place to draw the line between GSIBs and non-GSIBs: BNYM's score is 
roughly 251 percent of the score of the next highest-scoring firm. 
(There is also a large gap between Morgan Stanley's score and Wells 
Fargo's, but the former is only about 154 percent of the latter.) 
Furthermore, using this approach generates the same list of eight U.S. 
GSIBs as is produced by method 1.
    The Board has chosen the lower end of the target range for purposes 
of method 2. In determining the appropriate threshold method 2, the 
Board considered that the statutory mandate to protect U.S. financial 
stability argues for a method of calculating surcharges that addresses 
the importance of mitigating the effects on financial stability of the 
failure of U.S. GSIBs, which are among the most systemically important 
financial institutions in the world. The lower cut-off line is 
appropriate in light of the fact that method 2 uses a measure of short-
term wholesale funding in place of substitutability. Specifically, 
short-term wholesale funding has particularly strong contagion effects 
that could more easily lead to major systemic events, both through the 
freezing of credit markets and through asset fire sales. Further, 
although the failure of a large, non-GSIB poses a smaller risk to 
financial stability than does the failure of one of the eight GSIBs, it 
is nonetheless possible that the failure of a very large banking 
organization that is not a GSIB could have a negative effect on 
financial stability, particularly during a period of industry-wide 
stress such as occurred during the 2007-2008 financial crisis. This 
provides further support for setting the cut-off line for method 2 at 
the lower end of the target range.
    To implement the expected impact approach, the white paper provides 
a framework that relates capital ratio increases to reductions in 
probability of default. The white paper uses approximately three 
decades' worth of data on the return on risk-weighted assets (RORWA) of 
the fifty largest U.S. bank holding companies to determine the 
probability distribution of losses (that is, negative RORWAs) of 
various magnitudes by large U.S. bank holding companies. The 
probability that a bank holding company will default within a given 
time period is the probability that it will take losses within that 
time period that exceed the difference between its capital ratio at the 
beginning of the time period and a ``failure point'' beyond which the 
firm is unable to recover and ultimately defaults. Thus, the historical 
data on RORWA probabilities can be used to create a function that 
relates a firm's capital ratio to the probability that it will suffer a 
loss that causes it to default.
    By combining these three components, a capital surcharge can be 
assigned to GSIBs based on their LGD scores. This can be done by 
finding the ratio between a reference bank holding company's score 
(under each method) and a GSIB's score and then finding the capital 
surcharge that the GSIB must meet to equate that ratio with the ratio 
of the GSIB's probability of default to the reference BHC's probability 
of default. This analysis produces a range of capital surcharges for a 
given method 1 or method 2 score, which vary depending on the choice of 
reference BHC.
    Based on this analysis, the Board determined to apply surcharges to 
discrete ``bands'' of scores. The surcharges correspond to the Board's 
analysis of the various options for reference BHCs, including a 
reference BHC score of 130 for purposes of method 1 and a reference BHC 
score at or around 100 for purposes of method 2.
    Under both method 1 and method 2, GSIBs with a score between 130 
and 229 will be subject to a surcharge of 1.0 percentage points. The 
minimum surcharge of 1.0 percent for all GSIBs accounts for the 
inability to know precisely where the cut-off line between a GSIB and a 
non-GSIB will be at the time when a failure occurs, and the purpose of 
the surcharge of enhancing the resilience of all GSIBs.
    Above the first band, the method 1 and method 2 scores rise in 
increments of one half of a percentage point.\40\ This

[[Page 49091]]

sizing was chosen to ensure that modest changes in a firm's systemic 
indicators will generally not cause a change in its surcharge, while at 
the same time maintaining a reasonable level of sensitivity to changes 
in a firm's systemic footprint. Because small changes in a firm's score 
will generally not cause a change to the firm's surcharge, using 
surcharge bands will facilitate capital planning by firms subject to 
the rule.
---------------------------------------------------------------------------

    \40\ Method 1 scores above 530 are associated with surcharge 
bands that rise in increments of 1.0 percentage points. The 
heightened increment associated with the fifth band under method 1 
was designed to provide a strong disincentive for further increases 
in systemic footprint.
---------------------------------------------------------------------------

    In both methods, the bands are equally sized at 100 basis points 
per band. In developing the band structure, the Board also considered 
sizing the bands using the logarithmic function implied by the model 
used to relate a firm's score to its surcharge. A logarithmic function 
would result in smaller bands at lower scores and larger bands at 
higher scores. Larger surcharge bands for the most systemically 
important firms would allow these firms to expand their systemic 
footprint materially within the band without augmenting their capital 
buffers. As discussed further in the white paper, the Board determined 
that fixed-width bands were more appropriate than logarithmically sized 
bands for several reasons.
    For example, while the historical RORWA dataset used to derive the 
function relating a firm's LGD score to its surcharge contains many 
observations for relatively small losses, it contains far fewer 
observations of large losses of the magnitude necessary to cause the 
failure of a firm that has a very large systemic footprint because 
losses of that magnitude are much less common than smaller losses. The 
data set is also limited because the frequency of extremely large 
losses would likely have been higher in the absence of extraordinary 
government actions taken to protect financial stability, especially 
during the 2007-2008 financial crisis. This may mean that firms need to 
hold more capital to absorb losses in the tail of the distribution than 
the historical data would suggest. Finally, the data set are subject to 
survivorship bias, in that a given bank holding company is only 
included in the sample up until the point where it fails (or is 
acquired). If a firm fails in a given quarter, then its experience in 
that quarter is not included in the data set, and any losses realized 
during that quarter (including losses realized only upon failure) are 
therefore excluded from the dataset, leading to an underestimate of the 
probability of such large losses. Given this uncertainty, and in light 
of the Board's mandate under section 165 of the Dodd-Frank Act to 
impose prudential standards to mitigate risks to financial stability, 
the Board has determined that a higher threshold of certainty should be 
imposed on the sufficiency of capital requirements for the most 
systemically important financial institutions.
    The white paper also discusses two alternatives to the expected 
impact framework for calibrating GSIB capital surcharges. The first 
alternative is an economy-wide cost-benefit analysis, which would weigh 
the costs of higher capital requirements for GSIBs (such as a potential 
temporary decline in credit intermediation) against the benefits (most 
notably, a reduction in the frequency and severity of financial 
crises). Although analytical work by the BCBS suggests that capital 
ratios higher than those that will apply under the final rule would 
produce net benefits to the economy, the white paper does not use this 
framework as the primary calibration framework because its results are 
highly sensitive to a number of factors, including assumptions 
regarding the probability of and harm caused by economic crises, the 
extent to which higher capital requirements might reduce credit 
intermediation by firms subject to those requirements, the rate at 
which other firms would expand their output of credit intermediation, 
and the harm associated with a given diminution in credit 
intermediation.
    The second alternative is to calibrate the surcharge by determining 
the surcharge necessary to offset any funding advantage that GSIBs may 
derive from market participants' perception that the government may 
resort to extraordinary measures to rescue them if they come close to 
failure. Although any such funding advantage creates harmful economic 
distortions, the primary harm associated with GSIBs is the risk that 
their failure would pose to financial stability. Moreover, the size of 
any such funding advantage for an individual GSIB is very difficult to 
estimate. Accordingly, the white paper focuses on the expected impact 
framework rather than the funding-advantage-offset framework.
    Several commenters questioned why proposed method 2 produced higher 
surcharges, and why the inputs to the method 2 score are doubled. As 
discussed more fully in the white paper, the expected impact analysis 
suggests this doubling of scores originally included in the proposal is 
not relevant to the calculation of surcharges. Rather, as noted above, 
the higher method 2 surcharges result from the selection of a reference 
BHC at the lower end of the gap between a GSIB and a large non-
GSIB.\41\ This better aligns the surcharge with the risks presented by 
U.S. GSIBs to U.S. financial stability and the risks presented by 
short-term wholesale funding. Method 2 raw scores were doubled to 
permit comparability between scores produced under method 1 and method 
2.
---------------------------------------------------------------------------

    \41\ This is because the surcharges that result from the 
framework applied by the white paper depend only on the ratios 
between the GSIBs' scores and the score of the reference BHC; 
changes to the absolute values of these scores do not affect the 
resulting surcharges so long as those ratios remain the same.
---------------------------------------------------------------------------

    Several commenters expressed concern that the proposed calibration 
based on the expected impact approach did not take into account 
existing and forthcoming regulatory reforms, such as the LCR, net 
stable funding ratio (NSFR), and enhanced supplementary leverage ratio. 
The Board recognizes that most of the historical RORWA data used to 
calibrate the surcharge predate those reforms. If those reforms lower 
the probabilities of default of GSIBs for a given level of capital to a 
greater extent than they do for non-GSIBs (such as the reference BHC), 
then the historical data may overestimate the required surcharge 
levels. At the same time, however, the historical data may 
underestimate probabilities of default for GSIBs due to the fact that 
during certain time periods included within the sample (particularly 
the 2007-2008 financial crisis), the U.S. government took certain 
extraordinary actions to protect financial stability, and, without 
these interventions, large banking firms likely would have incurred 
substantially greater losses. Because a key purpose of post-crisis 
regulation is to ensure that such extraordinary government actions are 
not necessary in the future, an ideal data set would show the losses 
that would have occurred in the absence of government intervention and 
would thus include a higher incidence of significant losses. 
Accordingly, there are reasons to believe that the historical data 
overestimate the probability of large losses and there are reasons to 
believe that those data underestimate the probability of large losses. 
Given this balance of uncertainties, it is appropriate to treat the 
historical data as reasonably representative of future loss 
probabilities for large bank holding companies.
    Commenters also contended that the proposal did not clarify the 
characteristics of the large but not systemically important bank 
holding company that served as the reference point for the calibration. 
This topic is addressed in detail by the white paper; as discussed 
above, the white paper sets

[[Page 49092]]

forth and evaluates four potential choices of reference BHC. Further, 
at least one commenter noted that the BCBS study referenced in the 
proposal was not specifically targeted at large U.S. banking 
organizations. As discussed above and in the white paper, the BCBS 
long-term economic impact study is not directly relevant to the primary 
framework used to calibrate the GSIB surcharge (that is, the expected 
impact framework). However, although the BCBS study did not limit its 
analysis to capital requirements for U.S. GSIBs, the study nonetheless 
provides helpful context to inform the calibration of the GSIB 
surcharge.
    Some commenters expressed concern regarding the calibration's basis 
in the expected impact approach, arguing that, if failure is assumed, 
then pre-failure capital is likely to have no effect or only a limited 
effect on systemic impact. As discussed above, the expected impact 
framework does not ``assume'' failure; rather, it considers the harms 
that failure would cause and then considers the level of capital 
necessary to reduce the probability of failure to a level that is 
consistent with the purposes of the Dodd-Frank Act. Additional capital 
is a highly effective means of reducing a banking organization's 
probability of failure.
5. Costs and Benefits of the Proposal
    The Board sought comment on the potential costs of the proposed 
GSIB surcharge, and the potential impacts of the proposed framework on 
economic growth, credit availability, and credit costs in the United 
States. Some commenters suggested that the surcharges were supported by 
existing cost benefit analyses and would deliver substantial net 
economic benefits. However, several other commenters raised concern 
that the higher standards on U.S. GSIBs would inhibit lending, market-
making, and the provision of liquidity by the financial sector, or 
would impose costs on other market participants. Commenters contended 
that these concerns were particularly relevant in light of the 
introduction of higher regulatory requirements in the United States 
across several areas.
    While the GSIB surcharge may cause firms to hold additional 
capital, any costs on individual institutions and markets from the GSIB 
capital surcharge must be viewed in light of the benefits of the rule 
to U.S. financial stability more broadly. Notwithstanding the 
extraordinary support provided by U.S. and foreign governments, it is 
worth noting that the 2007-2008 crisis imposed significant costs on the 
financial markets and the real economy. Additional capital at the 
largest, most interconnected institutions, is intended to reduce the 
likelihood that the failure or material financial distress of these 
institutions will again pose a threat to U.S. financial stability. In 
particular, additional capital increases the resiliency of 
institutions, reducing the likelihood of failure and thereby protecting 
the firm's creditors and counterparties, as well as the U.S. government 
and taxpayers. Additional capital also decreases the risk that distress 
at any particular firm will be transmitted throughout the financial 
system through mechanisms such as fire sales of assets, thereby causing 
or exacerbating a financial crisis. Further, it enables a firm during a 
period of wider financial crisis to continue operations and, if need 
be, step into the place of distressed firms, limiting the impact of 
wider financial system stress on financial intermediation and reducing 
the adverse impact on the real economy.
    In addition, the costs of the final rule on individual institutions 
are mitigated in light of the phased implementation of the final rule. 
First, the GSIB surcharge is phased-in over several years, from January 
1, 2016, to December 31, 2018, which allows firms time to accumulate 
additional capital if necessary or to take actions to reduce their 
surcharges in the interim.
    In light of the timeframe for implementation of the final rule, it 
is not anticipated that the final rule would have significant adverse 
impacts on any specific financial markets. The Board intends to monitor 
the impacts of the enhanced prudential standards on financial 
institutions and markets more broadly, and to continue to evaluate 
whether these standards strike the appropriate balance between the 
costs imposed on institutions and financial markets and the benefits to 
U.S. financial stability.
    Some commenters argued that GSIB surcharges would add to the 
complexity and opacity of the regulatory capital and stress-testing 
requirements, and that these measures impose substantial compliance 
costs on banking organizations. Suggestions on how to address this 
issue included an approach where firms could choose to hold 
substantially more capital in return for regulatory relief in other 
areas. Several commenters expressed concerns about the continued 
reliance by regulators on the existing risk-based capital regime, with 
some arguing that greater emphasis should be placed on the leverage 
ratio.
    Several commenters argued that the proposed rule could result in 
competitive disadvantages to the detriment of the U.S. financial system 
and economy, particularly in light of other prudential measures. Other 
commenters suggested that the Board conduct a study of the effect of 
the proposed surcharges on the U.S. financial system and wider economy. 
Commenters also raised concerns that the proposed rule would cause 
financial activities to move to unregulated financial institutions.
    The goal of the GSIB surcharge is to increase the resiliency of the 
largest U.S. banking organizations, which is likely to result in lower 
costs of funding for these institutions and a safer, more stable U.S. 
financial system. As discussed above, these measures are necessary to 
address the risks to U.S. financial stability posed by the U.S. GSIBs, 
notwithstanding the fact that some foreign regulators may impose lower 
surcharges on banking organizations in their jurisdictions. Notably, 
certain jurisdictions have imposed capital surcharges on their largest 
bank holding companies in excess of GSIB surcharges under the BCBS 
framework.\42\
---------------------------------------------------------------------------

    \42\ For example, the Swedish authorities require their GSIBs to 
hold an additional 5.0 percent of risk-weighted assets in common 
equity tier 1 capital as of January 1, 2015 (see http://www.fi.se/upload/90_English/20_Publications/20_Miscellanous/2014/kapital_eng.pdf). In the Netherlands, the De Nederlandsche Bank 
imposed an additional buffer of 3.0 percent of risk-weighted assets 
in common equity tier 1 capital for Dutch GSIBs (see http://www.dnb.nl/en/news/news-and-archive/dnbulletin-2014/dnb306988.jsp). 
The Swiss framework for systemically important financial 
institutions requires such firms to hold at least and additional 3.0 
percent of risk-weighted assets in common equity tier 1 capital in 
addition to the Basel standard requirement of 7.0 percent (4.5 
percent minimum plus 2.5 percent capital conservation buffer) (see 
Addressing ``Too Big to Fail,'' The Swiss SIFI Policy, June 23, 2011 
available at https://www.finma.ch/en).
---------------------------------------------------------------------------

    The Board continues to monitor the effects of its regulation on the 
competitiveness of U.S. GSIBs as compared to foreign banking 
organizations and unregulated entities. The Board is actively 
coordinating with the Financial Stability Oversight Council in these 
efforts and will take action as necessary.
    Some commenters expressed concern that a GSIB surcharge would 
foster rather than correct the impression that certain firms are too-
big-to-fail (if a perception that firms were too-big-to-fail was still 
in place). To the extent that GSIBs continue to enjoy a ``too-big-to 
fail'' funding subsidy, the surcharge will help offset this subsidy and 
cancel out the undesirable effects.
    One commenter argued that the proposal did not include any analysis 
that would fulfill the Federal Reserve's obligations under the Riegle 
Community Development and Regulatory

[[Page 49093]]

Improvement Act (Riegle Act), which requires the Federal banking 
agencies to consider benefits any administrative burdens that 
regulations place on depository institutions. The Riegle Act requires a 
federal banking agency to consider administrative burdens and benefits 
in determining the effective date and administrative compliance 
requirements for new regulations that impose additional reporting, 
disclosure, or other requirements on a depository institution.\43\ 
Neither the proposal nor the final rule imposes additional reporting, 
disclosure, or other requirements on a depository institution. Rather, 
only certain large U.S. bank holding companies are subject to the rule.
---------------------------------------------------------------------------

    \43\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

D. Augmentation of the Capital Conservation Buffer

    Under the proposed rule, the GSIB surcharge augmented the 
regulatory capital rule's capital conversation buffer.\44\ Under the 
regulatory capital rule, a banking organization must maintain a minimum 
common equity tier 1 capital requirement of 4.5 percent, a minimum tier 
1 capital requirement of 6.0 percent, and a minimum total capital 
requirement of 8.0 percent. In addition to those minimums, in order to 
avoid limits on capital distributions and certain discretionary bonus 
payments, a banking organization must hold a capital conservation 
buffer composed of common equity tier 1 capital equal to more than 2.5 
percent of risk-weighted assets following a phase-in period. The 
capital conservation buffer is divided into quartiles, each associated 
with increasingly stringent limitations on capital distributions and 
certain discretionary bonus payments as the capital conservation buffer 
approaches zero.\45\
---------------------------------------------------------------------------

    \44\ 12 CFR 217.11(a).
    \45\ See id.
---------------------------------------------------------------------------

    Commenters generally supported the proposal for implementing the 
GSIB surcharge by augmenting the capital conservation buffer. The Board 
is finalizing this aspect of the proposal without change. Under the 
final rule, following a phase-in period, the GSIB surcharge expands 
each quartile of a GSIB's capital conservation buffer by the equivalent 
of one fourth of the GSIB surcharge.\46\ The minimum common equity tier 
1 capital requirement for banking organizations is 4.5 percent, which, 
when added to the capital conservation buffer of 2.5 percent, results 
in a banking organization needing to maintain a common equity tier 1 
capital ratio of more than 7.0 percent to avoid limitations on 
distributions and certain discretionary bonus payments. Under the final 
rule, this 7.0 percent level would be further increased by the 
applicable GSIB surcharge. The mechanics of the capital conservation 
buffer calculations, after incorporating the GSIB surcharge, are 
illustrated in the following example.\47\ A bank holding company has a 
method 1 score of 350, and thus would be identified as a GSIB. This 
method 1 score corresponds to a 2.0 percent surcharge. The GSIB has a 
method 2 score of 604 which corresponds to a surcharge of 3.0 percent. 
As the method 2 surcharge is larger than the method 1 surcharge, the 
GSIB would be subject to a GSIB surcharge of 3.0 percent. As a result, 
in order to avoid payout ratio limitations under the final rule, the 
GSIB must maintain a common equity tier 1 capital ratio in excess of 10 
percent (determined as the sum of the minimum common equity tier 1 
capital ratio of 4.5 percent plus an augmented capital conservation 
buffer of 5.5 percent). In determining the effect on capital 
distributions and certain discretionary bonus payments, each of the 
four quartiles of the GSIB's capital conservation buffer would be 
expanded by one fourth of its GSIB surcharge, or by 0.75 percentage 
points.
---------------------------------------------------------------------------

    \46\ Separate from the possible expansion of the capital 
conservation buffer set forth in this final rule, the capital 
conservation buffer could also be expanded by any applicable 
countercyclical capital buffer amount. See 12 CFR 217.11(b).
    \47\ For the purposes of this example, all regulatory capital 
requirements are assumed to be fully phased in.
---------------------------------------------------------------------------

    The proposal noted that the Board was analyzing whether the capital 
plan and stress test rules should also incorporate the GSIB 
surcharge.\48\ One commenter supported inclusion of the GSIB surcharge 
in the Comprehensive Capital Analysis and Review (CCAR). However, other 
commenters argued that the GSIB surcharge should not be included in 
CCAR as a post-stress minimum capital ratio. These commenters asserted 
that buffers should be available during times of stress, and treating 
the GSIB surcharge as a minimum ratio would not be consistent with such 
a goal. Similarly, commenters argued that incorporating the GSIB buffer 
into CCAR is inconsistent with the primary objective of CCAR to ensure 
post-stress going-concern viability. Further, commenters argued that 
CCAR was already more stringent on firms with significant trading 
operations due to the add-on global market scenario and counterparty 
default scenario.
---------------------------------------------------------------------------

    \48\ The capital plan rule (implemented by CCAR) evaluates a 
bank holding company's capital adequacy, capital adequacy process, 
and planned capital distributions, such as dividend payments and 
common stock repurchases. The stress test rules establish a forward-
looking quantitative evaluation of the impact of stressful economic 
and financial market conditions on the capital position of banking 
organization, using hypothetical set of adverse economic conditions 
as designed by the Board.
---------------------------------------------------------------------------

    The Board is currently considering a broad range of issues related 
to the capital plan and stress testing rules, including how the rules 
interact with other elements of the regulatory capital rules, such as 
the GSIB surcharge, and whether any modifications may be 
appropriate.\49\
---------------------------------------------------------------------------

    \49\ See 12 CFR 225.8 and 12 CFR part 252.
---------------------------------------------------------------------------

E. Implementation and Timing

    The proposed rule included provisions regarding both initial and 
ongoing applicability of the GSIB surcharge requirements. As noted 
above, the final rule revises the applicability threshold so that it 
includes only advanced approaches Board-regulated institutions.
1. Ongoing Applicability
    Subject to the initial applicability provisions described in 
section II.E.2 of this preamble, a bank holding company that becomes an 
advanced approaches Board-regulated institution must begin calculating 
its aggregate systemic indicator score under method 1 by December 31 of 
the calendar year after the year in which it became an advanced 
approaches Board-regulated institution. Initially, the bank holding 
company will calculate its method 1 score using data as of the same 
year in which it became an advanced approaches Board-regulated 
institution, including information reported on the FR Y-15 and 
aggregate global indicator amounts provided by the Board. For example, 
if an institution becomes an advanced approaches bank holding company 
based on data as of December 31, 2019, it would use information it 
reported on the FR Y-15 as of December 31, 2019, and aggregate global 
indicator amounts published by the Board in the fourth quarter of 2020 
to calculate its method 1 score by December 31, 2020.
    If the advanced approaches Board-regulated institution's aggregate 
systemic indicator score under method 1 meets or exceeds 130 basis 
points, the bank holding company would be identified as a GSIB, and 
would be required to calculate its GSIB surcharge (using both method 1 
and method 2) at that time. Like the calculation of the method 1 score, 
the GSIB will calculate its method 2 score using information it reports 
on the FR Y-15 as of the previous year-end. However, in place of

[[Page 49094]]

the aggregate global indicator amounts used in the calculation of the 
method 1 score, the GSIB's method 2 score will use the fixed 
coefficients set forth in the final rule.\50\
---------------------------------------------------------------------------

    \50\ As discussed in section IV of this preamble, the Board 
invited comment on a proposed new schedule to the FR Y-15 to collect 
information necessary to calculate a firm's short-term wholesale 
funding score on July 9, 2015. In connection with this final rule, 
the Board is amending the proposed schedule to align the calculation 
of short-term wholesale funding with the final rule's definition.
---------------------------------------------------------------------------

    The GSIB will have an additional year after calculating its method 
1 and method 2 scores to implement its GSIB surcharge. In the example 
above, the GSIB surcharge would be calculated by December 31, 2020, but 
would not take effect until January 1, 2022.
    After the initial GSIB surcharge is in effect, if a GSIB's systemic 
risk profile changes from one year to the next such that it becomes 
subject to a higher GSIB surcharge, the higher GSIB surcharge will not 
take effect for a full year (that is, two years from the systemic 
indicator measurement date). If a GSIB's systemic risk profile changes 
such that the GSIB would be subject to a lower GSIB surcharge, the GSIB 
would be subject to the lower surcharge beginning in the next calendar 
year.
2. Initial Applicability
    For the eight bank holding companies that are expected to qualify 
as GSIBs, the GSIB surcharge will be phased in from January 1, 2016, to 
January 1, 2019.\51\ This phase-in period was chosen to align with the 
phase-in of the capital conservation buffer and any applicable 
countercyclical capital buffer, as well as the phase-in period of the 
BCBS framework. Table 6 shows the regulatory capital levels that a GSIB 
must satisfy to avoid limitations on capital distributions and certain 
discretionary bonus payments during the applicable transition period, 
from January 1, 2016, to January 1, 2019.
---------------------------------------------------------------------------

    \51\ These bank holding companies correspond to those with more 
than $700 billion in total assets as reported on the FR Y-9C as of 
December 31, 2014, or more than $10 trillion in assets under custody 
as reported on the FR Y-15 as of December 31, 2014.

                                Table 6--Regulatory Capital Levels for GSIBs \52\
----------------------------------------------------------------------------------------------------------------
                                     Jan. 1, 2016        Jan. 1, 2017        Jan. 1, 2018        Jan. 1, 2019
----------------------------------------------------------------------------------------------------------------
Capital conservation buffer.....  0.625%............  1.25%.............  1.875%............  2.5%.
GSIB surcharge..................  25% of applicable   50% of applicable   75% of applicable   100% of applicable
                                   GSIB surcharge.     GSIB surcharge.     GSIB surcharge.     GSIB surcharge.
Minimum common equity tier 1      5.125% + 25% of     5.75% + 50% of      6.375% + 75% of     7.0% + 100% of
 capital ratio + capital           applicable GSIB     applicable GSIB     applicable GSIB     applicable GSIB
 conservation buffer +             surcharge.          surcharge.          surcharge.          surcharge.
 applicable GSIB surcharge.
Minimum tier 1 capital ratio +    6.625% + 25% of     7.25% + 50% of      7.875% + 75% of     8.5% + 100% of
 capital conservation buffer +     applicable GSIB     applicable GSIB     applicable GSIB     applicable GSIB
 applicable GSIB surcharge.        surcharge.          surcharge.          surcharge.          surcharge.
Minimum total capital ratio +     8.625% + 25% of     9.25% + 50% of      9.875% + 75% of     10.5% + 100% of
 capital conservation buffer +     applicable GSIB     applicable GSIB     applicable GSIB     applicable GSIB
 applicable GSIB surcharge.        surcharge.          surcharge.          surcharge.          surcharge.
----------------------------------------------------------------------------------------------------------------

    The  GSIB surcharge in effect on January 1, 2016, must be 
calculated by December 31, 2015. All components (other than short-term 
wholesale funding) will be based on the systemic indicator scores 
reported by a GSIB on the FR Y-15 as of December 31, 2014, and the 
aggregate global indicator amounts published by the Board in the fourth 
quarter of 2014. The short-term wholesale funding score will be based 
on the average of its weighted short-term wholesale funding amounts 
calculated for July 31, 2015, August 24, 2015, and September 30, 2015. 
These days were chosen to reduce burden on GSIBs, as GSIBs can use data 
that they are otherwise reporting to the Federal Reserve. GSIBs will 
also use this method to compute their short-term wholesale funding 
score for purposes of the GSIB surcharge calculated in 2016. For the 
surcharge calculated in 2017, and for all surcharges thereafter, GSIBs 
will compute their short-term wholesale funding score using average 
daily short-term wholesale funding amounts. As discussed in section IV 
of this preamble, the Board has proposed to collect these data on the 
FR Y-15.
---------------------------------------------------------------------------

    \52\ Table 6 assumes that the countercyclical capital buffer is 
zero.
---------------------------------------------------------------------------

    Bank holding companies that are not expected to qualify as GSIBs do 
not currently report short-term wholesale funding data to the Federal 
Reserve on the same basis that the bank holding companies expected to 
qualify as GSIBs report. Accordingly, to the extent that such a firm 
becomes a GSIB on or before December 31, 2016, the GSIB surcharge 
calculated on or before December 31, 2016, will equal the method 1 
surcharge of the bank holding company.
    Table 7 sets forth the reporting and compliance dates for the GSIB 
surcharge described above.

 Table 7--GSIB Surcharge Reporting and Compliance Dates During Phase-In
                                 Period
------------------------------------------------------------------------
                   Date                              Occurrence
------------------------------------------------------------------------
November 2015.............................  BCBS publishes aggregate
                                             global indicator amounts
                                             using 2014 data, and the
                                             Board publishes the
                                             aggregate global indicator
                                             amounts for use by U.S.
                                             bank holding companies
                                             shortly thereafter.
December 31, 2015.........................  Bank holding companies
                                             identified as GSIBs must
                                             calculate their GSIB
                                             surcharges using year-end
                                             2014 systemic indicator
                                             scores and short-term
                                             wholesale funding data as
                                             of July 31, August 24, and
                                             September 30, 2015.
                                            Advanced approaches bank
                                             holding companies must
                                             calculate their method 1
                                             score using year-end 2014
                                             systemic indicator scores.
January 1, 2016...........................  Bank holding companies
                                             identified as GSIBs are
                                             subject to the GSIB
                                             surcharge (as phased in)
                                             calculated by December 31,
                                             2015.
March 2016................................  FR Y-15 filing deadline
                                             reflecting bank holding
                                             company systemic indicator
                                             values and scores as of
                                             December 31, 2015.

[[Page 49095]]

 
November 2016.............................  BCBS publishes aggregate
                                             systemic indicator amounts
                                             using 2015 data, and the
                                             Board publishes the
                                             aggregate global indicator
                                             amounts for use by U.S.
                                             bank holding companies
                                             shortly thereafter.
December 31, 2016.........................  Bank holding companies
                                             identified as GSIBs must
                                             calculate their GSIB
                                             surcharge using year-end
                                             2015 systemic indicator
                                             scores and short-term
                                             wholesale funding data as
                                             of July 31, August 24, and
                                             September 30, 2015.
                                            Advanced approaches bank
                                             holding companies must
                                             calculate their method 1
                                             score using year-end 2015
                                             systemic indicator scores.
January 1, 2017...........................  If the GSIB surcharge
                                             calculated by December 31,
                                             2016, decreases, the GSIB
                                             is subject to that lower
                                             GSIB surcharge (as phased
                                             in) (if the GSIB surcharge
                                             increases, the increased
                                             GSIB surcharge comes into
                                             effect beginning on January
                                             1, 2018 (as phased in)).
March 2017................................  FR Y-15 filing deadline
                                             reflecting bank holding
                                             company systemic indicator
                                             values and scores as of
                                             December 31, 2016.
November 2017.............................  BCBS publishes aggregate
                                             systemic indicator amounts
                                             using 2016 data, and the
                                             Board publishes the
                                             aggregate global indicator
                                             amounts for use by U.S.
                                             bank holding companies
                                             shortly thereafter.
December 31, 2017.........................  Bank holding companies
                                             identified as GSIBs must
                                             calculate their GSIB
                                             surcharge using year-end
                                             2016 systemic indicator
                                             scores and 2016 short-term
                                             wholesale funding data.
                                            Advanced approaches bank
                                             holding companies must
                                             calculate their method 1
                                             score using year-end 2016
                                             systemic indicator scores.
January 1, 2018...........................  If the GSIB surcharge
                                             calculated by December 31,
                                             2017, decreases, the GSIB
                                             is subject to that lower
                                             GSIB surcharge (if the GSIB
                                             surcharge increases, the
                                             increased GSIB surcharge
                                             comes into effect beginning
                                             on January 1, 2019).
------------------------------------------------------------------------

III. Indicators of Global Systemic Risk

    As described above, the proposed rule determined the systemic 
scores and GSIB surcharges of bank holding companies using six 
components under two methodologies, method 1 and method 2, which are 
indicative of the global systemic importance of bank holding companies. 
There is general global consensus that each category included in the 
BCBS framework is a contributor to the risk a banking organization 
poses to financial stability.\53\ Short-term wholesale funding is also 
indicative of systemic importance, and this component is included in 
method 2.
---------------------------------------------------------------------------

    \53\ Discussion of this view is contained in the report to the 
G20 by the BIS, FSB, and IMF (2009). Further, earlier, the ECB 
(2006) studied indicators such as size and interconnectedness in 
their efforts to identify systemically important banking 
organizations. Similar work was undertaken by the BCBS when it 
developed the current indicators used in identifying GSIBs. As noted 
in the proposal, many of these factors are also consistent with the 
factors that the Board considers in reviewing financial stability 
implications of proposed mergers and acquisitions by banking 
organizations. See, e.g., section 165 of the Dodd-Frank Act, Revised 
BCBS Document, and Guidance to Assess the Systemic Importance of 
Financial Institutions, Markets and Instruments: Initial 
Considerations, Financial Stability Board, International Monetary 
Fund and Bank for International Settlements, Report to G20 Finance 
Ministers and Governors, October 2009; Identifying Large and Complex 
Banking Groups for Financial System Stability Assessment, ECB, in: 
Financial Stability Review, December 2006, pp. 131-139.
---------------------------------------------------------------------------

A. Size

    The proposal used size as a category of systemic importance. A 
banking organization's distress or failure is more likely to negatively 
impact the financial markets and the economy more broadly if the 
banking organization's activities comprise a relatively large share of 
total financial activities. Moreover, the size of exposures and volume 
of transactions and assets managed by a banking organization are 
indicative of the extent to which clients, counterparties, and the 
broader financial system could suffer disruption if the firm were to 
fail or become distressed. In addition, the larger a banking 
organization is, the more difficult it generally is for other firms to 
replace its services and, therefore, the greater the chance that the 
banking organization's distress or failure would cause disruption. 
Under the proposal, size was measured by total exposures, which was 
equal to the bank holding company's measure of total leverage exposure 
calculated pursuant to the regulatory capital rule.\54\
---------------------------------------------------------------------------

    \54\ See 12 CFR 217.10(c)(4).
---------------------------------------------------------------------------

    One commenter contended that, under the proposal, the size 
indicator would effectively be weighted by more than 20 percent under 
both method 1 and method 2, because other indicators are strongly 
correlated with size, and therefore suggested that the size indicator 
be weighted less than 20 percent or that caps be used to limit its 
impact. As discussed above, there is general global consensus that each 
category included in the framework is a critical contributor to the 
losses imposed on the system given a firm's default, and the equal 
weighting was proposed because each of the five factors contributes to 
the effect the failure of a firm will have on financial stability, and 
the particular score a firm will receive on a given factor will depend 
on its unique characteristics relative to the group of firms.\55\ 
Accordingly, the final rule assigns an equal weighting to each 
category, and the Board intends to reassess the regime at regular 
intervals to ensure that equal weighting remains appropriate.
---------------------------------------------------------------------------

    \55\ See, e.g., section 165 of the Dodd-Frank Act and the 
Revised BCBS Document.
---------------------------------------------------------------------------

    Under the final rule, a bank holding company's size is measured by 
total exposures, which would mean the bank holding company's measure of 
total leverage exposure calculated pursuant to the regulatory capital 
rule.\56\ The Board has separately proposed changes to the FR Y-15 to 
align its definition of ``total exposure'' with the definition in the 
regulatory capital rule.\57\
---------------------------------------------------------------------------

    \56\ See 12 CFR 217.10(c)(4).
    \57\ See 80 FR 39433.
---------------------------------------------------------------------------

B. Interconnectedness

    The proposal used interconnectedness as a category of systemic 
importance. Financial institutions may be interconnected in many ways, 
as banking organizations commonly engage in transactions with other 
financial institutions that give rise to a wide range of contractual 
obligations. Financial distress at a banking organization may 
materially raise the likelihood of distress at other firms given the 
network of contractual obligations throughout the financial system. 
Accordingly, a banking organization's systemic impact is likely to be 
directly related to its interconnectedness vis-[agrave]-vis other 
financial institutions and the financial sector as a whole. The Board 
did not receive any comments on this aspect of the proposed rule and is 
adopting it in the final rule without change.

[[Page 49096]]

    Under the final rule, interconnectedness is measured by intra-
financial system assets, intra-financial system liabilities, and 
securities outstanding as of December 31 of a given year. These 
indicators represent the major components of intra-financial system 
transactions and contractual relationships, and are broadly defined to 
capture the relevant dimensions of these activities by a bank holding 
company. For the purpose of the intra-financial system assets and 
intra-financial system liabilities indicators, financial institutions 
are defined in the FR Y-15 instructions as depository institutions, 
bank holding companies, securities dealers, insurance companies, mutual 
funds, hedge funds, pension funds, investment banks, and central 
counterparties. Central banks and multilateral development banks are 
excluded, but state-owned commercial banks are included.

C. Substitutability

    The proposal used substitutability as a category of systemic 
importance. The potential adverse systemic impact of the material 
financial distress or failure of a banking organization will depend in 
part on the degree to which other banking organizations are able to 
serve as substitutes in the event that the banking organization is 
unable to perform its role. Under the proposed rule, three indicators 
were used to measure substitutability: Assets under custody as of 
December 31 of a given year, the total value of payments sent over the 
calendar year, and the total value of transactions in debt and equity 
markets underwritten during the calendar year. Relative to the other 
categories in the method 1 surcharge, the substitutability category had 
a greater-than-intended impact on the assessment of systemic importance 
for certain banking organizations that are dominant in the provision of 
asset custody, payment systems, and underwriting services. The Board 
therefore proposed to cap the maximum score for the substitutability 
category at 500 basis points (or 100 basis points, after the 20 percent 
weighting factor is applied) so that the substitutability category 
would not have a greater than intended impact on a bank holding 
company's global systemic score.\58\ This cap was also consistent with 
the approach taken in the BCBS framework. The following discusses how 
each of the three substitutability indicators will be measured and 
reported on the FR Y-15. The Board did not receive any comments on this 
aspect of the proposed rule and is adopting it in the final rule 
without change.
---------------------------------------------------------------------------

    \58\ See paragraph 19 of the Revised BCBS Document.
---------------------------------------------------------------------------

    1. Assets under custody. The collapse of a GSIB that holds assets 
on behalf of customers, particularly other financial firms, could 
severely disrupt financial markets and have serious consequences for 
the domestic and global economies. The final rule measures assets under 
custody as the aggregate value of assets that a bank holding company 
holds as a custodian. For purposes of the final rule, a custodian is 
defined as a banking organization that manages or administers the 
custody or safekeeping of stocks, debt securities, or other assets for 
institutional and private investors.
    2. Payments activity. The collapse of a GSIB that processes a large 
volume of payments is likely to affect a large number of customers, 
including financial, non-financial, and retail customers. In the event 
of collapse, these customers may be unable to process payments and 
could experience liquidity issues as a result. Additionally, if a 
banking organization became unable to distribute funds held, those 
funds could become inaccessible to the recipients, which could prevent 
those recipients from meeting obligations to their creditors.
    The final rule uses a bank holding company's share of payments made 
through large-value payment systems and through agent banks as an 
indicator of the company's degree of systemic importance within the 
context of substitutability. Specifically, payments activity is the 
value of all cash payments sent via large-value payment systems, along 
with the value of all cash payments sent through an agent (e.g., using 
a correspondent or nostro account), over the calendar year in the 
currencies specified on the FR Y-15.
    3. Underwritten transactions in debt and equity markets. The 
failure of a GSIB with a large share of the global market's debt and 
equity underwriting could impede new securities issuances and 
potentially increase the cost of debt and capital. In order to assess a 
bank holding company's significance in underwriting as compared to its 
peers, the final rule measures underwriting activity as the aggregate 
value of equity and debt underwriting transactions of a banking 
organization, conducted over the calendar year, as specified on the FR 
Y-15.

D. Complexity

    The final rule uses complexity as a category of systemic 
importance. The global systemic impact of a banking organization's 
failure or distress should be positively correlated to that 
organization's business, operational, and structural complexity.\59\ 
Generally, the more complex a banking organization is, the greater the 
expense and time necessary to resolve it. Costly resolutions can have 
negative cascading effects in the markets, including disorderly 
unwinding of positions, fire-sales of assets, disruption of services to 
customers, and increased uncertainty in the markets.
---------------------------------------------------------------------------

    \59\ See paragraph 25 of the Revised BCBS Document.
---------------------------------------------------------------------------

    The Board sought comment on whether the three complexity indicators 
(notional amount of OTC derivatives transactions, Level 3 assets, and 
trading and AFS securities) appropriately reflect a bank holding 
company's complexity, and what alternative or additional indicators 
might better reflect complexity and global systemic importance. One 
commenter argued that it was appropriate to weight derivatives 
exposures heavily in the complexity metric and that the metric should 
also take into account Level 2 assets as well as Level 3 assets as 
firms may be incentivized to reclassify existing Level 3 assets as 
Level 2 in order to achieve a lower score. Commenters also argued that 
resolvability should be taken into account more directly as part of the 
complexity category when calibrating the GSIB surcharges, for instance, 
by making the GSIB surcharge inversely proportional to the difficulty 
of resolution as judged by resolution plans. It was further suggested 
that measurements of organizational and operational complexity should 
be taken into account in the complexity indicator.
    Resolvability and organizational complexity are important 
contributors to the potential systemic effects of a GSIB default and 
the complexity indicators included in the methodology seek to reflect 
this in a quantifiable way. These factors are reflected in several 
other of the standardized, objective measures included in the rule, 
including in Level 3 assets and cross-jurisdictional activity. The 
final rule does not include more subjective, qualitative measures of a 
bank holding company's organizational complexity and resolvability, 
because those would rely on firm-specific, subjective judgments. The 
Board will monitor the evolution of indicator scores over time and 
consider changes to the framework as appropriate.
    Additionally, commenters requested that the Board give even greater 
weight to a GSIB's overall complexity indicator in calculating the 
surcharge because a GSIB's level of complexity might

[[Page 49097]]

increase the firm's probability of failure. While complexity is an 
important component for assessing systemic importance, the rule is 
intended to capture multiple dimensions of a firm's systemic footprint, 
including size, interconnectedness, substitutability, cross-
jurisdictional activity and reliance on short-term wholesale funding, 
all of which are also important contributors to the systemic impact 
caused by the failure of a firm.
    As reflected in the FR Y-15, the final rule includes three 
indicators of complexity: notional amount of OTC derivatives, Level 3 
assets, and trading and AFS securities as of December 31 of a given 
year. The indicators are measured as follows:
    1. Notional amount of OTC derivatives. A bank holding company's OTC 
derivatives activity will be the aggregate notional amount of the bank 
holding company's OTC derivative transactions that are cleared through 
a central counterparty or settled bilaterally.
    2. Level 3 assets. Level 3 assets will be equal to the value of the 
assets that the bank holding company measures at fair value for 
purposes of its FR Y-9C quarterly report (Schedule HC-Q, column E). 
These are generally illiquid assets with fair values that cannot be 
determined by observable data, such as market price signals or models. 
Instead, the value of the Level 3 assets is calculated based on 
internal estimates or risk-adjusted value ranges by the banking 
organization. Firms with high levels of Level 3 assets would be 
difficult to value in times of stress, thereby negatively affecting 
market confidence in such firms and creating the potential for a 
disorderly resolution process.
    3. Trading and AFS securities. A banking organization's trading and 
AFS securities can cause a market disturbance through mark-to-market 
losses and fire sales of assets in times of distress. Specifically, a 
banking organization's write-down or sales of securities could drive 
down the prices of these securities, which could cause a spill-over 
effect that forces other holders of the same securities to experience 
mark-to-market losses. Accordingly, the final rule considers a bank 
holding company's trading and AFS securities as an indicator of 
complexity.

E. Cross-jurisdictional Activity

    The proposal used cross-jurisdictional activity as a category of 
systemic importance. Banking organizations with a large global presence 
are more difficult and costly to resolve than purely domestic 
institutions. Specifically, the greater the number of jurisdictions in 
which a firm operates, the more difficult it would be to coordinate its 
resolution and the more widespread the spillover effects were it to 
fail.
    The Board did not receive any comments on this part of the proposed 
rule and is adopting it in the final rule without change. Under the 
final rule, the two indicators included in this category--cross-
jurisdictional claims and cross-jurisdictional liabilities--measure a 
bank holding company's global reach by considering its activity outside 
its home jurisdiction as compared to the cross-jurisdictional activity 
of its peers. In particular, claims include deposits and balances 
placed with other banking organizations, loans and advances to banking 
organizations and non-banks, and holdings of securities. Liabilities 
include the liabilities of all offices of the same banking organization 
(headquarters as well as branches and subsidiaries in different 
jurisdictions) to entities outside of its home market.

F. Use of Short-term Wholesale Funding

    To determine its method 2 surcharge under the proposal, a GSIB 
would have been required to compute its short-term wholesale funding 
score. To compute its short-term wholesale funding score, the GSIB 
would have first determined, on a consolidated basis, the amount of its 
short-term wholesale funding sources with a remaining maturity of less 
than one year for each business day of the preceding calendar year. 
Then, the GSIB would have applied weights to the short-term wholesale 
funding sources based on the remaining maturity of a short-term 
wholesale funding source and the asset class of any collateral backing 
the source. Next, the GSIB would have divided its weighted short-term 
wholesale funding amount by its average risk-weighted assets. Finally, 
to arrive at its short-term wholesale funding score, a GSIB would have 
multiplied the ratio of its weighted short-term wholesale funding 
amount over its average risk-weighted assets by a fixed conversion 
factor (175). The following discussion describes the proposed 
components of short-term wholesale funding and proposed weights, the 
division of the measure by average risk-weighted assets, and the 
application of the proposed conversion factor.
    Several commenters requested additional information on the 
empirical analysis that supported the proposed weights of different 
types of short-term wholesale funding. For example, some commenters 
argued that the weights were not sufficiently risk-sensitive and would 
not reflect actual economic risk, while other commenters expressed 
concern that the proposed weights could inappropriately incentivize 
firms to rely more on certain forms of short-term wholesale funding.
    The weighting system for short-term wholesale funding liabilities 
was designed to strike a balance between simplicity and risk-
sensitivity. Short-term wholesale funding liabilities with shorter 
residual maturities were assigned higher weights, because such 
liabilities pose greater risk of runs and attendant fire sales. The 
liability categories used in the weighting system and the relative 
weights assigned to different liabilities generally aligned with the 
LCR, and reflected the comments that the Board received in connection 
with that rulemaking. In framing the proposal and the final rule, the 
Board also took into account studies of fire sale risks in key short-
term wholesale funding markets.\60\
---------------------------------------------------------------------------

    \60\ See, e.g., Begalle, Martin, McAndrews, and McLaughlin, The 
Risk of Fire Sales in the Tri-Party Repo Market, http://www.newyorkfed.org/research/staff_reports/sr616.pdf (May 2013).
---------------------------------------------------------------------------

    Commenters asserted that the rule should take into account the 
amount of long-term funding that a firm has relative to the amount of 
short-term funding, suggesting that a firm's wholesale funding 
component should be reduced if the firm relies to a greater extent on 
more stable forms of funding. However, while relative amounts of long- 
and short-term funding may be relevant in considering the probability 
of a firm's failure, the surcharge is designed so that a firm's capital 
requirement increases based on systemic losses assuming a default. 
Systemic losses in the event of default can be expected to generally 
increase in proportion to the total amount of short-term funding a firm 
has used, rather than in proportion to the ratio of a firm's short-term 
wholesale funding to its total funding. Accordingly, the final rule 
maintains the focus on a firm's amount of short-term wholesale funding 
rather than on the firm's funding mix.
1. Components and Weighting of Short-term Wholesale Funding
    The proposal identified five categories of short-term wholesale 
funding sources: secured funding transactions, unsecured wholesale 
funding, covered asset exchanges, short positions, brokered deposits. 
The funding sources were defined using terminology from the LCR rule 
and aligned with items that are reported on the Board's Complex 
Institution Liquidity Monitoring Report on Form FR 2052a. Identified 
funding

[[Page 49098]]

sources would have qualified as short-term wholesale funding only if 
the remaining maturity was less than 1 year.
 a. Secured Funding Transaction
    The proposal aligned the definition of ``secured funding 
transaction'' with the definition of that term in the LCR rule. As 
such, it included repurchase transactions, securities lending 
transactions, secured funding from a Federal Reserve Bank or a foreign 
central bank, Federal Home Loan Bank advances, secured deposits, loans 
of collateral to effect customer short positions, and other secured 
wholesale funding arrangements. These funding sources were treated as 
short-term wholesale funding, provided that they have a remaining 
maturity of less than one year, because counterparties are more likely 
to abruptly remove or cease to roll-over secured funding transactions 
as compared to longer-term funding. This behavior gives rise to cash 
outflows during periods of stress. Secured funding transactions secured 
by Level 1 liquid assets received a weight between 25 percent and 0 
percent, secured funding transactions secured by Level 2a liquid assets 
received a weight between 50 percent and 0 percent, secured funding 
transactions secured by Level 2b liquid assets received a weight 
between 75 percent to 10 percent, and secured funding transactions 
secured by other assets received a weight between 100 percent and 25 
percent, depending on the remaining maturity.
    Some commenters suggested that advances from the Federal Home Loan 
Banks be excluded from the short-term wholesale funding factor, as they 
proved a stable source of funding through the crisis. Commenters also 
noted that Federal Home Loan Bank advances received preferable 
treatment in the LCR. The final rule treats Federal Home Loan Bank 
borrowings in the same manner as borrowings from other counterparties 
in light of the purpose of the GSIB surcharge, which is to reduce 
systemic risk. Firm borrowings from the Federal Home Loan Banks tend to 
increase during times of stress relative to Federal Home Loan Bank 
borrowings in normal times.
    Some commenters argued that the proposal should have differentiated 
between centrally cleared and non-centrally cleared securities 
financing transactions, and that centrally cleared transactions should 
be either excluded from the short-term wholesale funding metric or 
assigned a lower weight. Commenters noted that the BCBS's large 
exposures framework exempts certain exposures to qualifying central 
counterparties, and that the Financial Stability Board's minimum 
margins framework for securities financing transactions does not apply 
to centrally cleared transactions.
    Like the proposal, the final rule does not differentiate between 
centrally cleared and non-centrally cleared securities financing 
transactions. While there may be some financial stability benefits 
associated with central clearing of certain types of securities 
financing transactions, central clearing does not completely eliminate 
the risks posed by securities financing transactions, and therefore it 
would not be appropriate at this time to exclude centrally cleared 
securities financing transactions from the short-term wholesale funding 
metric. Nor is it possible at this time to measure the financial 
stability benefits of central clearing with enough precision to warrant 
specific reductions in the weights assigned.
b. Unsecured Wholesale Funding
    The proposal aligned the definition of ``unsecured wholesale 
funding'' with the definition of that term in the LCR rule. Such 
funding included the following: Wholesale deposits; federal funds 
purchased; unsecured advances from a public sector entity, sovereign 
entity, or U.S. government sponsored enterprise; unsecured notes; 
bonds, or other unsecured debt securities issued by a GSIB (unless sold 
exclusively to retail customers or counterparties); brokered deposits 
from non-retail customers; and any other transaction where an on-
balance sheet unsecured credit obligation has been contracted. Under 
the proposal, unsecured wholesale funding where the customer or 
counterparty is not a financial sector entity (or a consolidated 
subsidiary of a financial sector entity) received a weight between 50 
percent and 0 percent, and unsecured wholesale funding where the 
customer or counterparty is a financial sector entity or a consolidated 
subsidiary thereof received a weight between 100 percent and 25 
percent.
    As evidenced in the financial crisis, funding from wholesale 
counterparties presents greater run risk to banking organizations 
during periods of stress as compared to the same type of funding 
provided by retail counterparties, because wholesale counterparties 
facing financial distress are likely to withdraw large amounts of 
wholesale funding in order to meet financial obligations. The proposal 
included in short-term wholesale funding unsecured wholesale funding 
that is partially or fully covered by deposit insurance, as such 
funding poses run risks even when deposit insurance is present. It did 
not permit the GSIB to reflect offsetting amounts from the release of 
assets held in segregated accounts in connection with wholesale 
deposits.
    Several commenters suggested that the short-term wholesale funding 
calculation take into account the amount of high quality liquid assets 
that firms are required to hold against different funding sources under 
the LCR. For example, commenters cited that unsecured deposits from 
financial clients may only be used to fund Level 1 high quality liquid 
assets because they are assigned a 100 percent outflow under the LCR.
    In response to comments, the final rule reduces the weight assigned 
to unsecured short-term wholesale funding. The maximum weight for 
wholesale deposits from non-financial clients is reduced from 50 
percent to 25 percent, while the maximum weight for other types of 
unsecured short-term wholesale funding will be reduced from 100 percent 
to 75 percent. This reduction is intended to recognize the fact that 
firms often use wholesale deposits and other unsecured types of short-
term wholesale funding to fund relatively liquid assets, and are 
generally required by the LCR to do so.
    The final rule does not reduce the weight to 0, as the LCR does not 
fully address the systemic risks of unsecured short-term wholesale 
funding. The LCR generally permits the outflows from such liabilities 
to be offset using either high quality liquid assets or the inflows 
from short-term claims with a matching maturity. In cases where a firm 
uses short-term wholesale funding to fund a short-term loan, a run by 
the firm's short-term creditors could force the firm to quickly reduce 
the amount of credit it extends to its clients or counterparties. Those 
counterparties could then be forced to rapidly liquidate assets, 
including relatively illiquid assets, which might give rise to fire 
sale effects.\61\ Given these possibilities, it would not be 
appropriate for the calibration to assume that short-term funding 
liabilities that are assigned relatively high outflows under the LCR 
can only be used to fund high quality liquid assets.
---------------------------------------------------------------------------

    \61\ The risk described here is similar to the risk associated 
with matched books of securities financing transactions, which is 
discussed in http://www.federalreserve.gov/newsevents/speech/tarullo20131122a.htm.
---------------------------------------------------------------------------

    Several commenters contended that the proposal inappropriately 
classified ``excess custody deposits'' as short-term wholesale funding. 
These commenters asserted that such deposits are a stable source of 
funding in periods of market stress, and are generally placed with 
central banks or invested in high quality

[[Page 49099]]

liquid assets. Commenters also noted that excess custody deposits arise 
from operational servicing relationships and that it would be difficult 
in practice for custody banks to turn away client deposits of this 
type. Commenters argued that excess custody deposits should be excluded 
from the short-term wholesale funding amount when these are offset by 
riskless assets, subject to specific caps.
    Deposits described by commenters as ``excess custody deposits'' do 
not qualify as operational deposits because they are not needed for 
utilizing the operational service provided by the bank holding company 
and, thus, are not as stable. In response to the more limited argument 
that a firm should be allowed to offset its excess custody deposit 
amount when it invests such deposits in riskless assets, it would be 
inconsistent to allow such an offset in the context of only one 
particular type of short-term wholesale funding liability. Further, 
implementing this approach would require the Board to determine which 
assets should count as ``riskless.'' On the one hand, a very narrow 
approach--for example, one in which only central bank reserves are 
considered riskless--could have distortive effects. On the other hand, 
a broader approach in which a wider variety of assets were deemed 
riskless would undermine the macroprudential goals of the short-term 
wholesale funding component of the surcharge. Nevertheless, excess 
custody deposits receive a lower weight under the final rule than they 
would have under the proposal because of the reductions made in the 
final rule to the weights assigned to unsecured short-term wholesale 
funding.
c. Short Positions
    The proposed rule treated short positions as short-term wholesale 
funding. Short positions were defined as a transaction where a bank 
holding company has borrowed a security from a counterparty to sell to 
a second counterparty, and must return the security to the initial 
counterparty in the future. A short position involving a certain 
security was assigned the same weight as a secured short-term wholesale 
funding liability backed by the same asset. In addition, the proposal 
treated loans of collateral to a bank holding company's customer to 
effect short positions as secured funding transactions, and weighted 
these accordingly.\62\
---------------------------------------------------------------------------

    \62\ As noted above, under the proposal, secured funding 
transactions secured by Level 1 liquid assets received a weight 
between 25 percent and 0 percent, secured funding transactions 
secured by Level 2a liquid assets received a weight between 50 
percent and 0 percent, secured funding transactions secured by Level 
2b liquid assets received a weight between 75 percent to 10 percent, 
and secured funding transactions secured by other assets received a 
weight between 100 percent and 25 percent, depending on the 
remaining maturity.
---------------------------------------------------------------------------

    Several commenters argued that liabilities associated with both 
firm and customer short transactions should be excluded from the short-
term wholesale funding measure, or at a minimum, that the weight 
assigned to short positons should be reduced (e.g., to 25 percent). 
With respect to firm short positions, commenters argued that, because 
only the firm has the ability to close out the position, firm short 
positions do not give rise to the same type of run risk as other short-
term wholesale funding obligations. With respect to client short 
positions, commenters argued that margin requirements create incentives 
for clients to close long and short positions simultaneously, and that 
the simultaneous unwinding of such positions would mitigate funding 
risk. Commenters also argued that the Board should distinguish between 
short positions based on whether they are covered using firm or client 
assets (internally covered short positions) or assets borrowed from 
external sources (externally covered short positions). Commenters 
argued that shorts covered by external borrowings do not provide 
funding to the banking organization executing the short, and should 
therefore not be treated as short-term funding transactions.
    In response to the comments received, the final rule excludes firm 
short positions involving Level 1 and Level 2A securities from the 
short-term wholesale funding definition, and assigns a weight of 25 
percent to firm short positions involving Level 2B securities or 
securities that do not qualify as high quality liquid assets. This 
weighting is appropriate because the risk of runs from firm short 
positions is mitigated by the firm's ability to control the closeout of 
the short position. On the other hand, if a firm short position moves 
against a firm, or if a securities lender demands that the firm return 
the security that the firm borrowed to facilitate the short position, 
there would be some liquidity risk. Hence, the final rule assigns a 
positive weight to firm short positions involving Level 2B securities 
and securities that do not qualify as high quality liquid assets.
    The treatment of client short positions in the final rule is 
unchanged from the proposal. While margin requirements may create 
incentives for clients to symmetrically unwind long and short 
positions, the closeout of client short positions is ultimately 
controlled by a firm's clients and is, therefore, more unpredictable 
from the firm's perspective. This treatment aligns with the LCR, under 
which client short positions in a given security are assigned the same 
outflow rate as other secured funding transactions collateralized by 
that security. With respect to the argument that externally covered 
short positions should be excluded because they do not provide funding 
to the firm, external securities borrowing is an asset on the firm's 
balance sheet that the firm or client short position serves to fund.
d. Covered Asset Exchanges
    The proposed definition of short-term wholesale funding also 
included the fair market value of all assets that a GSIB must return in 
connection with transactions where it has provided a non-cash asset of 
a given liquidity category to a counterparty in exchange for non-cash 
assets of a higher liquidity category, and the GSIB and the 
counterparty agreed to return the assets to each other at a future 
date. The unwinding of such transactions could negatively impact a 
GSIB's funding profile in a period of stress to the extent that the 
unwinding of the transaction requires the GSIB to obtain funding for a 
less liquid asset or security if the counterparty is unwilling to roll 
over the transaction. Under the proposal, covered asset exchanges 
involving the future exchange of a Level 1 asset for a Level 2a asset 
were assigned a maximum weight of 50 percent, while other covered asset 
exchanges would receive a maximum weight of 75 percent.
    Some commenters argued that this approach would result in the 
assignment of excessive weights for certain covered asset exchanges, 
and instead proposed that the weight for a covered asset exchange 
should be based on the incremental liquidity need resulting from the 
exchange.
    The final rule maintains the proposed treatment of covered asset 
exchanges. The alternative approach described by commenters would be 
similar to the LCR in providing differential treatment for all 
combinations of asset types. However, the short-term wholesale funding 
weighting approach of the final rule takes a more simplified approach 
than the LCR by combining those asset exchanges that have similar 
characteristics in a broader set of categories.

[[Page 49100]]

e. Brokered Deposits and Brokered Sweep Deposits
    The proposal characterized retail brokered deposits and brokered 
sweep deposits as short-term wholesale funding because these forms of 
funding have demonstrated volatility in times of stress, 
notwithstanding the presence of deposit insurance.\63\ These types of 
deposits can be easily moved from one institution to another during 
times of stress, as customers and counterparties seek higher interest 
rates or seek to use those funds for other purposes and on account of 
the incentives that third-party brokers have to provide the highest 
possible returns for their clients. However, the proposed definition of 
short-term funding would exclude deposits from retail customers and 
counterparties that are not brokered deposits or brokered sweep 
deposits, as these deposits are less likely to pose liquidity risks in 
times of stress.
---------------------------------------------------------------------------

    \63\ Brokered deposits from non-retail clients are treated as 
unsecured wholesale funding, discussed in section III.F.1.b of this 
preamble.
---------------------------------------------------------------------------

    Under the proposal, brokered deposits and brokered sweep deposits 
from retail customers or counterparties were assigned a maximum weight 
of 50 percent, while other brokered deposits and brokered sweep 
deposits received a maximum weight of 100 percent.
    Commenters contended that the weighting system imposed capital 
charges that were too high on all brokered deposits and argued that the 
weighting system should make more fine-grained distinctions between 
different types of brokered deposits and brokered sweep deposits. 
Commenters also argued that the weighting system should distinguish 
between insured and non-insured brokered deposits, brokered retail and 
non-retail deposits, reciprocal and non-reciprocal brokered deposits 
and brokered affiliate and non-affiliate based deposit sweep 
arrangements, and should treat certain affiliate based deposit sweep 
arrangements similarly to traditional retail deposits.
    The final rule treats brokered deposits as short-term wholesale 
funding because they are generally considered less stable than standard 
retail deposits. In order to preserve the relative simplicity of the 
short-term wholesale funding metric, the final rule does not 
distinguish between different types of brokered deposits and brokered 
sweep deposits. In connection with reducing the weight on unsecured 
wholesale deposits from non-financial and financial clients, however, 
the final rule adjusts the treatment of brokered deposits and brokered 
sweep deposits. Under the final rule, brokered deposits and brokered 
sweep deposits provided by a retail customer are assigned a maximum 
weight of 25 percent. Other brokered deposits and brokered sweep 
deposits are assigned a maximum weight of 75. These changes ensure that 
brokered deposits and brokered sweep deposits receive the same weight 
as other similar forms of unsecured short-term wholesale funding.
2. Dividing by Risk-Weighted Assets
    Under the proposal, after calculating its weighted short-term 
wholesale funding amount, the GSIB would have divided its weighted 
short-term wholesale funding amount by its average risk-weighted 
assets, measured as the four-quarter average of the firm's total risk-
weighted assets associated with the lower of its risk-based capital 
ratios as reported on its FR Y-9C for each quarter of the previous 
year.
    One commenter argued that the risk-weighted assets denominator as 
part of the short-term wholesale funding calculation should be 
reconsidered to better incentivize prudent use of short-term wholesale 
funding. This commenter noted that, given that method 2 under the 
proposal uses a bank's risk-weighted assets as the ratio denominator 
for short-term wholesale funding, if a GSIB simultaneously reduces 
short-term wholesale funding and risk-weighted assets, its surcharge 
would remain static as a percentage of its risk-weighted assets. 
Similarly, the commenter noted that, if a GSIB reduces risk-weighted 
assets and does not reduce short-term wholesale funding, its GSIB 
surcharge could increase as a percentage of risk-weighted assets.
    As discussed in the preamble to the proposal, consideration of a 
GSIB's short-term wholesale funding amount as a percentage of its risk-
weighted assets is an appropriate means of scaling in a firm-specific 
manner a firm's use of short-term wholesale funding. This approach 
reflects the view that the systemic risks associated with a firm's use 
of short-term wholesale funding are comparable regardless of the 
business model of the firm. The use of short-term wholesale funding 
poses similar systemic risks regardless of whether short-term wholesale 
funding is used by a firm that is predominantly engaged in trading 
operations as opposed to a firm that combines large trading operations 
with large commercial banking activities, and regardless of whether a 
firm uses short-term wholesale funding to fund securities inventory as 
opposed to securities financing transaction matched book activity. 
Dividing short-term wholesale funding by risk-weighted assets helps 
ensure that two firms that use the same amount of short-term wholesale 
funding would be required to hold the same dollar amount of additional 
capital regardless of such differences in business model.
    While a firm that simultaneously reduces its short-term wholesale 
funding and risk-weighted assets may not see changes in its surcharge 
requirement, the same surcharge requirements as a percentage of risk-
weighted assets would require the firm to hold a lower dollar amount of 
additional capital because the firm's risk weighted assets would also 
be lower. Similarly, while a firm that reduces its risk-weighted assets 
but uses the same amount of short-term wholesale funding could see an 
increase in its surcharge requirement, the dollar amount of capital the 
firm would have to hold would be reduced because of its lower risk-
weighted assets. Thus, these outcomes are consistent with the view that 
the dollar amount of capital that a firm should be required to hold 
because of the short-term wholesale funding component of the surcharge 
should be independent of that firm's risk-weighted assets 
characteristics.
3. Application of Fixed Conversion Factor
    Under the proposal, to arrive at its short-term wholesale funding 
score, a GSIB would have multiplied the ratio of its weighted short-
term wholesale funding amount over its average risk-weighted assets by 
a fixed conversion factor (175). The conversion factor accounted for 
the fact that, in contrast to the other systemic indicators that 
comprise a GSIB's method 2 score, the short-term wholesale funding 
score does not have an associated aggregate global indicator. The 
conversion factor was intended to weight the short-term wholesale 
funding amount such that the short-term wholesale funding score 
receives an equal weight as the other systemic indicators within method 
2 (i.e., 20 percent), and is based upon estimates of short-term 
wholesale funding levels at the eight bank holding companies currently 
identified as GSIBs. To calculate its method 2 score, a GSIB would add 
the short-term wholesale funding score to its other systemic indicator 
scores, and multiply by two.
    The final rule adopts the fixed conversion factor, and combines the 
conversion factor with the proposed doubling. Accordingly, the score 
would equal 350. This fixed conversion factor was developed using 2013 
data on short-term wholesale funding sources from the FR 2052a for the 
eight firms currently identified as GSIBs under the

[[Page 49101]]

proposed methodology, the average of 2013 quarterly reported risk-
weighted assets, and the year-end 2013 aggregate global indicator 
amounts for the size, interconnectedness, complexity, and cross-
jurisdictional activity systemic indicators. Using these data, the 
total weighted basis points for the size, interconnectedness, 
complexity, and cross-jurisdictional activity systemic indicator scores 
for the firms currently identified as GSIBs were calculated. Given that 
this figure is intended to comprise 80 percent of the method 2 score, 
the weighted basis points accounting for the remaining 20 percent of 
the method 2 score were determined. The fixed conversion factor was 
determined by dividing the aggregate estimated short-term wholesale 
funding amount by average risk weighted assets for the firms currently 
identified as GSIBs and calculating the weighted basis points that 
would be necessary to make the short-term wholesale measure equal to 20 
percent of the firm's method 2 score.
    A fixed conversion factor is intended to facilitate one of the 
goals of the incorporation of short-term wholesale funding into the 
GSIB surcharge framework, which is to provide incentives for GSIBs to 
decrease their use of this less stable form of funding. To the extent 
that a GSIB reduces its use of short-term wholesale funding, its short-
term wholesale funding score will decline, even if GSIBs in the 
aggregate reduce their use of short-term wholesale funding.

IV. Amendments to the FR Y-15

    On July 9, 2015, the Board published for comment a proposal to 
modify the FR Y-15, which, among other things, is the Board's form for 
collecting data needed to compute the GSIB surcharge. The modification 
to this form would introduce a new schedule, Schedule G, to capture a 
banking organization's use of short-term wholesale funding (FR Y-15 
proposal).\64\ The proposed definition of ``short-term wholesale 
funding'' and weights in the FR Y-15 proposal were based on the Board's 
December 18, 2014 GSIB proposal.\65\ The final rule proposes to 
incorporate updates into Schedule G of the FR Y-15 to align it with the 
definition in the final rule. The proposed revisions to Schedule G 
include (1) moving three line items to different tiers, (2) adding an 
item to capture firm short positions, (3) adding two automatically-
calculated items, (4) adding one item derived from the FR Y-9C, (5) 
deleting two items, and (6) collecting customer short positions as part 
of the secured funding totals. The Federal Reserve estimates that these 
minimal differences will not affect the burden estimates provided in 
the separate July proposal. Thus, the burden estimates below reflect 
the numbers included in the separate FR Y-15 proposal. The comment 
period for the proposed changes to the FR Y-15 proposal would also be 
extended to 60 days after the publication of the final rule in the 
Federal Register, to allow commenters the opportunity to comment on the 
full proposal, including changes to the short-term wholesale funding 
measure adopted in this final rule.
---------------------------------------------------------------------------

    \64\ See 80 FR 39433. The proposed changes would also (1) change 
the reporting frequency of the FR Y-15 from annual to quarterly, (2) 
expand the reporting panel to include certain savings and loan 
holding companies, (3) revise the calculation methodology for the 
systemic indicators to align with the Board's regulatory capital 
rules and international accounting standards, (4) allow respondents 
to construct their own exchange rates for converting payments data; 
and (5) incorporate instructional clarifications.
    \65\ See 79 FR 75477 (December 18, 2014).
---------------------------------------------------------------------------

    Concurrently with this final notice, the Federal Reserve is 
publishing the instructions and reporting form corresponding to the 
proposed changes to the FR Y-15 published in the Federal Register on 
July 9, 2015. The instructions and reporting form also reflect the 
proposed changes to the short-term wholesale funding measure described 
above.

V. Modifications to Related Rules

    The Board, along with the FDIC and the OCC, issued a final rule 
imposing enhanced supplementary leverage ratio standards on certain 
bank holding companies and their subsidiary insured depository 
institutions.\66\ The enhanced supplementary leverage ratio standards 
applied to U.S. top-tier bank holding companies with more than $700 
billion in total consolidated assets or more than $10 trillion in 
assets under custody (covered BHCs), as well as insured depository 
institution subsidiaries of the covered BHCs. The enhanced standards 
imposed a 2 percent leverage ratio buffer similar to the capital 
conservation buffer above the minimum supplementary leverage ratio 
requirement of 3 percent on the covered BHCs, and also required insured 
depository institution subsidiaries of covered BHCs to maintain a 
supplementary leverage ratio of at least 6 percent to be well 
capitalized under the prompt corrective action framework. The Board 
proposed to revise the terminology and applicability of the enhanced 
supplementary leverage ratio so that the enhanced supplementary 
leverage ratio would apply to entities identified as GSIBs under the 
proposal.
---------------------------------------------------------------------------

    \66\ 78 FR 24528 (May 1, 2014).
---------------------------------------------------------------------------

    The Board did not receive any comments on this aspect of the 
proposal, therefore, the final rule revises the terminology used to 
identify the firms subject to the enhanced supplementary leverage ratio 
standards to reflect the proposed GSIB surcharge framework. 
Specifically, the Board has replaced the use of ``covered BHC'' with 
firms identified as GSIBs using the methodology of this rule within the 
prompt corrective action provisions of Regulation H (12 CFR part 208), 
as well as within the Board's regulatory capital rule. The eight U.S. 
top-tier bank holding companies that were ``covered BHCs'' under the 
enhanced supplementary leverage ratio rule's definition are the same 
eight U.S. top-tier bank holding companies that are identified as GSIBs 
under the final rule. These changes simplify the Board's regulations by 
removing overlapping definitions, and do not result in a material 
change in the provisions applicable to these bank holding companies.

VI. Regulatory Analysis

A. Paperwork Reduction Act (PRA)

    In accordance with section 3512 of the Paperwork Reduction Act of 
1995 (44 U.S.C. 3501-3521) (PRA), the Board may not conduct or sponsor, 
and a respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number. The OMB control number is 7100-0352 
and 7100-NEW. The Board reviewed the final rule under the authority 
delegated to the Board by OMB.

    The final rule contains requirements subject to the PRA. The 
recordkeeping requirements are found in sections 217.402 and 
217.403. In connection with this final rule, the Board will issue a 
separate notice amending the proposed revisions to the FR Y-15 
published on July 9, 2015, to reflect the final rule's definition of 
short-term wholesale funding.

    Report title: Recordkeeping Requirements Associated with Regulation 
Q (Capital Adequacy of Bank Holding Companies, Savings and Loan Holding 
Companies, and State Member Banks).
    Agency form number: Reg Q.
    OMB control number: 7100-NEW.
    Frequency: Annual.
    Reporters: Bank holding companies, savings and loan holding 
companies, and state member banks.
    Estimated annual reporting hours: 11 hours.

[[Page 49102]]

    Estimated average hours per response: 0.5 hours for each method.
    Number of respondents: 13 for Identification of a global 
systemically important BHC and 8 for GSIB surcharge.
    Abstract: A bank holding company is a global systemically important 
BHC if its method 1 score equals or exceeds 130 basis points. A BHC 
must calculate its method 1 and method 2 scores on an annual basis by 
December 31 of each year.
    Section 217.402 (Identification of a global systemically important 
BHC) requires an advanced approaches BHC to annually calculate its 
method 1 score, which is the sum of its systemic indicator scores for 
the twelve systemic indicators set forth in Table 1 of the final rule. 
The systemic indicator score in basis points for a given systemic 
indicator is equal to the ratio of the amount of that systemic 
indicator, as reported on the bank holding company's most recent FR Y-
15; to the aggregate global indicator amount for that systemic 
indicator published by the Board in the fourth quarter of that year; 
multiplied by 10,000; and multiplied by the indicator weight 
corresponding to the systemic indicator as set forth in Table 1 of the 
final rule.
    Section 217.403 (GSIB surcharge) requires a BHC to annually 
calculate its GSIB surcharge, which is the greater of its method 1 and 
method 2 scores. The method 2 score is equal to the sum of the global 
systemically important BHC's systemic indicator scores for the nine 
systemic indicators set forth in Table 1 of the final rule and the 
global systemically important BHC's short-term wholesale funding score. 
The systemic indicator score is equal to the amount of the systemic 
indicator, as reported on the global systemically important BHC's most 
recent FR Y-15, multiplied by the coefficient corresponding to the 
systemic indicator set forth in Table 1 of the final rule.

B. Regulatory Flexibility Act Analysis

    The Board is providing a regulatory flexibility analysis with 
respect to the final rule. The Regulatory Flexibility Act, 5 U.S.C. 601 
et seq. (RFA), generally requires that to provide a regulatory 
flexibility analysis in connection with a final rulemaking. As 
discussed above, the final rule is designed to identify U.S. bank 
holding companies that are GSIBs and to apply capital surcharges to the 
GSIBs that are calibrated to their systemic risk profiles. Under 
regulations issued by the Small Business Administration, a small entity 
includes a bank holding company with assets of $550 million or less 
(small bank holding company).\67\ As of December 31, 2014, there were 
approximately 3,833 small bank holding companies.
---------------------------------------------------------------------------

    \67\ See 13 CFR 121.201. Effective July 14, 2014, the Small 
Business Administration revised the size standards for banking 
organizations to $550 million in assets from $500 million in assets. 
79 FR 33647 (June 12, 2014).
---------------------------------------------------------------------------

    The final rule applies to any top-tier U.S. bank holding company 
domiciled in the United States that is subject to the advanced 
approaches rule pursuant to the regulatory capital rule that is not a 
subsidiary of a foreign banking organization. Bank holding companies 
that are subject to the final rule therefore substantially exceed the 
$550 million asset threshold at which a banking entity would qualify as 
a small bank holding company.
    Because the final rule would only apply to advanced approaches 
BHCs, which generally have at least $250 billion in assets or $10 
billion in on-balance-sheet foreign assets, the rule would not apply to 
any small bank holding company for purposes of the RFA. Therefore, 
there are no significant alternatives to the final rule that would have 
less economic impact on small bank holding companies. As discussed 
above, the projected reporting, recordkeeping, and other compliance 
requirements of the rule are expected to be small. The Board does not 
believe that the rule duplicates, overlaps, or conflicts with any other 
Federal rules. In light of the foregoing, the Board does not believe 
that the final rule would have a significant economic impact on a 
substantial number of small entities.
    The Board sought comment on whether the proposed rule would impose 
undue burdens on, or have unintended consequences for, small 
organizations, and received no comments on this aspect of the proposal. 
In light of the foregoing, the Board does not believe that the final 
rule will have a significant impact on small entities.

C. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires the Board to use 
plain language in all proposed and final rules published after January 
1, 2000. The Board has sought to present the final rule in a simple 
straightforward manner. The Board did not receive any comment on its 
use of plain language.

List of Subjects

12 CFR Part 208

    Accounting, Agriculture, Banks, banking, Confidential business 
information, Consumer protection, Crime, Currency, Global systemically 
important bank, Insurance, Investments, Mortgages, Reporting and 
recordkeeping requirements, Securities.

12 CFR Part 217

    Administrative practice and procedure, Banks, banking. Holding 
companies, Reporting and recordkeeping requirements, Securities.

Authority and Issuance

    For the reasons set forth in the preamble, chapter II of title of 
the Code of Federal Regulations is amended as follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

0
1. The authority citation for part 208 continues to read as follows:

    Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1833(j), 
1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x, 1835a, 1882, 
2901-2907, 3105, 3310, 3331-3351, 3905-3909, and 5371; 15 U.S.C. 
78b, 78I(b), 78l(i), 780-4(c)(5), 78q, 78q-1, and 78w, 1681s, 1681w, 
6801, and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106 
and 4128.

Subpart D--Prompt Corrective Action


Sec.  208.41  [Amended]

0
2. Effective January 1, 2018, in Sec.  208.41:
0
a. Paragraph (c) as added on May 1, 2014 (79 FR 24540), is withdrawn.
0
b. The redesignation of paragraphs (c) through (j) as paragraphs (d) 
through (k) on May 1, 2014 (79 FR 24540), is withdrawn.
0
c. Paragraphs (g) through (p) are redesignatged as paragraphs (h) 
through (q).
0
d. New paragraph (g) is added to read as follows:


Sec.  208.41  Definitions for purposes of this subpart.

* * * * *
    (g) Global systemically important BHC has the same meaning as in 
Sec.  217.2 of Regulation Q (12 CFR 217.2).
* * * * *


Sec.  208.43  [Amended]

0
3. Effective January 1, 2018, in Sec.  208.43 paragraphs (a)(2)(iv)(C) 
and (c)(1)(iv) as added on May 1, 2014 (79 FR 24540) are amended by 
removing the words ``covered BHC'' and adding in their place the words 
``global systemically important BHC''.

[[Page 49103]]

PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND 
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)

0
4. The authority citation for part 217 continues to read as follows:

    Authority:  12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a, 
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904, 
3906-3909, 4808, 5365, 5368, 5371.


0
5. Effective December 1, 2015, revise Sec.  217.1, paragraph (f)(3), to 
read as follows:


Sec.  217.1  Purpose, applicability, reservations of authority, and 
timing.

* * * * *
    (f) * * *
    (3) Beginning on January 1, 2016, and subject to the transition 
provisions in subpart G of this part, a Board-regulated institution is 
subject to limitations on distributions and discretionary bonus 
payments with respect to its capital conservation buffer, any 
applicable countercyclical capital buffer amount, and any applicable 
GSIB surcharge, in accordance with subpart B of this part.
* * * * *


Sec.  217.1  [Amended]

0
6. Effective January 1, 2018, in Sec.  217.1, paragraph (f)(4) as 
revised on May 1, 2014 (79 FR 24540) is amended by removing the words 
``covered BHC''and adding the words ``global systemically important 
BHC'' in their place.
0
7. Effective December 1, 2015, add definitions of ``Global systemically 
important BHC'' and ``GSIB surcharge'' in alphabetical order, to read 
as follows:


Sec.  217.2  Definitions.

* * * * *
    Global systemically important BHC means a bank holding company that 
is identified as a global systemically important BHC pursuant to Sec.  
217.402.
    GSIB surcharge means the capital surcharge applicable to a global 
systemically important BHC calculated pursuant to Sec.  217.403.
* * * * *


Sec.  217.2  [Amended]

0
8. Effective January 1, 2018, in Sec.  217.2, the definition of 
``covered BHC'' published on May 1, 2014 (79 FR 24540), is withdrawn.
0
9. Effective December 1, 2015, in Sec.  217.11:
0
a. The section heading is revised.
0
b. Paragraph (a)(4)(ii) is revised.
0
c. Table 1 to Sec.  217.11 is revised.
0
d. Paragraph (c) is added.
    The revisions and addition read as follows:


Sec.  217.11  Capital conservation buffer, countercyclical capital 
buffer amount, and GSIB surcharge.

* * * * *
    (a) * * *
    (4) * * *
    (ii) A Board-regulated institution with a capital conservation 
buffer that is greater than 2.5 percent plus 100 percent of its 
applicable countercyclical capital buffer in accordance with paragraph 
(b) of this section, and 100 percent of its applicable GSIB surcharge, 
in accordance with paragraph (c) of this section, is not subject to a 
maximum payout amount under this section.
* * * * *

                         Table 1 to Sec.   217.11--Calculation of Maximum Payout Amount
----------------------------------------------------------------------------------------------------------------
        Capital conservation buffer          Maximum payout ratio  (as a percentage of eligible retained income)
----------------------------------------------------------------------------------------------------------------
Greater than 2.5 percent plus 100 percent   No payout ratio limitation applies.
 of the Board-regulated institution's
 applicable countercyclical capital buffer
 amount and 100 percent of the Board-
 regulated institution's applicable GSIB
 surcharge.
Less than or equal to 2.5 percent plus 100  60 percent.
 percent of the Board-regulated
 institution's applicable countercyclical
 capital buffer amount and 100 percent of
 the Board-regulated institution's
 applicable GSIB surcharge, and greater
 than 1.875 percent plus 75 percent of the
 Board-regulated institution's applicable
 countercyclical capital buffer amount and
 75 percent of the Board-regulated
 institution's applicable GSIB surcharge.
Less than or equal to 1.875 percent plus    40 percent.
 75 percent of the Board-regulated
 institution's applicable countercyclical
 capital buffer amount and 75 percent of
 the Board-regulated institution's
 applicable GSIB surcharge, and greater
 than 1.25 percent plus 50 percent of the
 Board-regulated institution's applicable
 countercyclical capital buffer amount and
 50 percent of the Board-regulated
 institution's applicable GSIB surcharge.
Less than or equal to 1.25 percent plus 50  20 percent.
 percent of the Board-regulated
 institution's applicable countercyclical
 capital buffer amount and 50 percent of
 the Board-regulated institution's
 applicable GSIB surcharge, and greater
 than 0.625 percent plus 25 percent of the
 Board-regulated institution's applicable
 countercyclical capital buffer amount and
 25 percent of the Board-regulated
 institution's applicable GSIB surcharge.
Less than or equal to 0.625 percent plus    0 percent.
 25 percent of the Board-regulated
 institution's applicable countercyclical
 capital buffer amount and 25 percent of
 the Board-regulated institution's
 applicable GSIB surcharge.
----------------------------------------------------------------------------------------------------------------

* * * * *
    (c) GSIB surcharge. A global systemically important BHC must use 
its GSIB surcharge calculated in accordance with subpart H of this part 
for purposes of determining its maximum payout ratio under Table 1 to 
Sec.  217.11.


Sec.  217.11  [Amended]

0
10. Effective January 1, 2018, in Sec.  217.11:
0
a. Paragraphs (a)(2)(v) and (a)(2)(vi), paragraph (c), and Table 2 
added on May 1, 2014 (79 FR 24540) are amended by removing the words 
``covered BHC'' or ``covered BHC's'' wherever they appear and adding in 
their place the words ``global systemically important BHC'' or ``global 
systemically important BHC's'' respectively.
0
b. Paragraph (c) added on May 1, 2014 (79 FR 24540) is redesignated as 
paragraph (d).

0
11. Effective December 1, 2015, revise Sec.  217.300(a)(2) to read as 
follows:


Sec.  217.300  Transitions.

    (a) * * *

[[Page 49104]]

    (2) Notwithstanding Sec.  217.11, beginning January 1, 2016 through 
December 31, 2018 a Board-regulated institution's maximum payout ratio 
shall be determined as set forth in Table 1 to Sec.  217.300.

                                            Table 1 to Sec.   217.300
----------------------------------------------------------------------------------------------------------------
                                    Capital conservation    Maximum payout ratio  (as a percentage of eligible
        Transition period                  buffer                            retained income)
----------------------------------------------------------------------------------------------------------------
Calendar year 2016...............  Greater than 0.625     No payout ratio limitation applies under this section.
                                    percent plus 25
                                    percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 25
                                    percent of any
                                    applicable GSIB
                                    surcharge.
                                   Less than or equal to  60 percent.
                                    0.625 percent plus
                                    25 percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 25
                                    percent of any
                                    applicable GSIB
                                    surcharge, and
                                    greater than 0.469
                                    percent plus 17.25
                                    percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 17.25
                                    percent of any
                                    applicable GSIB
                                    surcharge.
                                   Less than or equal to  40 percent.
                                    0.469 percent plus
                                    17.25 percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 17.25
                                    percent of any
                                    applicable GSIB
                                    surcharge, and
                                    greater than 0.313
                                    percent plus 12.5
                                    percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 12.5
                                    percent of any
                                    applicable GSIB
                                    surcharge.
                                   Less than or equal to  20 percent.
                                    0.313 percent plus
                                    12.5 percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 12.5
                                    percent of any
                                    applicable GSIB
                                    surcharge, and
                                    greater than 0.156
                                    percent plus 6.25
                                    percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 6.25
                                    percent of any
                                    applicable GSIB
                                    surcharge.
                                   Less than or equal to  0 percent.
                                    0.156 percent plus
                                    6.25 percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 6.25
                                    percent of any
                                    applicable GSIB
                                    surcharge.
Calendar year 2017...............  Greater than 1.25      No payout ratio limitation applies under this section.
                                    percent plus 50
                                    percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 50
                                    percent of any
                                    applicable GSIB
                                    surcharge.
                                   Less than or equal to  60 percent.
                                    1.25 percent plus 50
                                    percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 50
                                    percent of any
                                    applicable GSIB
                                    surcharge, and
                                    greater than 0.938
                                    percent plus 37.5
                                    percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 37.5
                                    percent of any
                                    applicable GSIB
                                    surcharge.
                                   Less than or equal to  40 percent.
                                    0.938 percent plus
                                    37.5 percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 37.5
                                    percent of any
                                    applicable GSIB
                                    surcharge, and
                                    greater than 0.625
                                    percent plus 25
                                    percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 25
                                    percent of any
                                    applicable GSIB
                                    surcharge.
                                   Less than or equal to  20 percent.
                                    0.625 percent plus
                                    25 percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 25
                                    percent of any
                                    applicable GSIB
                                    surcharge, and
                                    greater than 0.313
                                    percent plus 12.5
                                    percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 12.5
                                    percent of any
                                    applicable GSIB
                                    surcharge.
                                   Less than or equal to  0 percent.
                                    0.313 percent plus
                                    12.5 percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 12.5
                                    percent of any
                                    applicable GSIB
                                    surcharge.
Calendar year 2018...............  Greater than 1.875     No payout ratio limitation applies under this section.
                                    percent plus 75
                                    percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 75
                                    percent of any
                                    applicable GSIB
                                    surcharge.
                                   Less than or equal to  60 percent.
                                    1.875 percent plus
                                    75 percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 75
                                    percent of any
                                    applicable GSIB
                                    surcharge, and
                                    greater than 1.406
                                    percent plus 56.25
                                    percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 56.25
                                    percent of any
                                    applicable GSIB
                                    surcharge.
                                   Less than or equal to  40 percent.
                                    1.406 percent plus
                                    56.25 percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 56.25
                                    percent of any
                                    applicable GSIB
                                    surcharge, and
                                    greater than 0.938
                                    percent plus 37.5
                                    percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 37.5
                                    percent of any
                                    applicable GSIB
                                    surcharge.
                                   Less than or equal to  20 percent.
                                    0.938 percent plus
                                    37.5 percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 37.5
                                    percent of any
                                    applicable GSIB
                                    surcharge, and
                                    greater than 0.469
                                    percent plus 18.75
                                    percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 18.75
                                    percent of any
                                    applicable GSIB
                                    surcharge.
                                   Less than or equal to  0 percent.
                                    0.469 percent plus
                                    18.75 percent of any
                                    applicable
                                    countercyclical
                                    capital buffer
                                    amount and 18.75
                                    percent of any
                                    applicable GSIB
                                    surcharge.
----------------------------------------------------------------------------------------------------------------


[[Page 49105]]

* * * * *

0
12. Effective December 1, 2015, add subpart H to part 217 to read as 
follows:
Subpart H--Risk-based Capital Surcharge for Global Systemically 
Important Bank Holding Companies
Sec.
217.400 Purpose and applicability.
217.401 Definitions.
217.402 Identification as a global systemically important BHC.
217.403 GSIB surcharge.
217.404 Method 1 score.
217.405 Method 2 score.
217.406 Short-term wholesale funding score.

    Authority: 12 U.S.C. 5365.

Subpart H--Risk-based Capital Surcharge for Global Systemically 
Important Bank Holding Companies


Sec.  217.400  Purpose and applicability.

    (a) Purpose. This subpart implements provisions of section 165 of 
the Dodd-Frank Act (12 U.S.C. 5365), by establishing a risk-based 
capital surcharge for global systemically important bank holding 
companies.
    (b) Applicability--(1) General. This subpart applies to a bank 
holding company that is an advanced approaches Board-regulated 
institution and that is not a consolidated subsidiary of a bank holding 
company or a consolidated subsidiary of a foreign banking organization.
    (2) Effective date of calculation and surcharge requirements. 
Subject to the transition provisions in paragraph (b)(3) of this 
section:
    (i) A bank holding company that becomes an advanced approaches 
Board-regulated institution must determine whether it qualifies as a 
global systemically important BHC pursuant to Sec.  217.402 by December 
31 of the year immediately following the year in which the bank holding 
company becomes an advanced approaches Board-regulated institution; and
    (ii) A bank holding company that becomes a global systemically 
important BHC pursuant to Sec.  217.402 must calculate its GSIB 
surcharge pursuant to Sec.  217.403 by December 31 of the year in which 
the bank holding company is identified as a global systemically 
important BHC and must use that GSIB surcharge for purposes of 
determining its maximum payout ratio under Table 1 to Sec.  217.11 
beginning on January 1 of the year that is immediately following the 
full calendar year after it is identified as a global systemically 
important BHC.
    (3) Transition provisions for the calculation and surcharge 
requirements--(i) GSIB surcharge requirements for bank holding 
companies with more than $700 billion in total assets or $10 trillion 
in assets under custody. A bank holding company that is an advanced 
approaches Board-regulated institution with more than $700 billion in 
total assets as reported on the FR Y-9C as of December 31, 2014, or 
more than $10 trillion in assets under custody as reported on the FR Y-
15 as of December 31, 2014, must calculate its GSIB surcharge by 
December 31, 2015, and use that GSIB surcharge to determine its maximum 
payout ratio under Table 1 to Sec.  217.11 beginning on January 1, 
2016; provided that for the GSIB surcharges required to be calculated 
by December 31, 2015 and by December 31, 2016, the bank holding company 
must calculate its short-term wholesale funding score using the average 
of its weighted short-term wholesale funding amounts (defined in Sec.  
217.406(b)), calculated for July 31, 2015, August 24, 2015, and 
September 30, 2015.
    (ii) Calculation and GSIB surcharge requirements for other advanced 
approaches Board-regulated institutions. A bank holding company that 
was an advanced approaches Board-regulated institution as of December 
31, 2014, and is not described in paragraph (b)(3)(i) of this section 
must:
    (A) Determine whether it qualifies as a global systemically 
important BHC pursuant to Sec.  217.402 by December 31, 2015; and
    (B) To the extent it qualifies as a global systemically important 
BHC by December 31, 2015, calculate its GSIB surcharge by December 31, 
2016. The GSIB surcharge calculated by December 31, 2016, shall equal 
the method 1 surcharge (defined in Sec.  217.403) of the bank holding 
company.
    (c) Reservation of authority. (1) The Board may apply this subpart 
to any Board-regulated institution, in whole or in part, by order of 
the Board based on the institution's capital structure, size, level of 
complexity, risk profile, scope of operations, or financial condition.
    (2) The Board may adjust the amount of the GSIB surcharge 
applicable to a global systemically important BHC, or extend or 
accelerate any compliance date of this subpart, if the Board determines 
that the adjustment, extension, or acceleration is appropriate in light 
of the capital structure, size, complexity, risk profile, and scope of 
operations of the global systemically important BHC. In increasing the 
size of the GSIB surcharge for a global systemically important BHC, the 
Board shall follow the notice and response procedures in 12 CFR part 
263, subpart E.


Sec.  217.401  Definitions.

    As used in this subpart:
    (a) Aggregate global indicator amount means, for each systemic 
indicator, the aggregate measure of that indicator, which is equal to 
the most recent annual dollar figure published by the Board that 
represents the sum of systemic indicator values of:
    (1) The 75 largest global banking organizations, as measured by the 
Basel Committee on Banking Supervision; and
    (2) Any other banking organization that the Basel Committee on 
Banking Supervision includes in its sample total for that year.
    (b) Assets under custody means assets held as a custodian on behalf 
of customers, as reported by the bank holding company on the FR Y-15.
    (c) Average risk-weighted assets means the four-quarter average of 
the measure of total risk-weighted assets associated with the lower of 
the bank holding company's common equity tier 1 risk-based capital 
ratios, as reported on the bank holding company's FR Y-9C for each 
quarter of the previous calendar year.
    (d) Brokered deposit has the meaning set forth in 12 CFR 249.3.
    (e) Consolidated subsidiary has the meaning set forth in 12 CFR 
249.3.
    (f) Covered asset exchange means a transaction in which a bank 
holding company has provided assets of a given liquidity category to a 
counterparty in exchange for assets of a higher liquidity category, and 
the bank holding company and the counterparty agreed to return such 
assets to each other at a future date. Categories of assets, in 
descending order of liquidity, are level 1 liquid assets, level 2A 
liquid assets, level 2B liquid assets, and assets that are not HQLA. 
Covered asset exchanges do not include secured funding transactions.
    (g) Financial sector entity has the meaning set forth in 12 CFR 
249.3.
    (h) GAAP means generally accepted accounting principles as used in 
the United States.
    (i) High-quality liquid asset (HQLA) has the meaning set forth in 
12 CFR 249.3.
    (j) Cross-jurisdictional claims means foreign claims on an ultimate 
risk basis, as reported by the bank holding company on the FR Y-15.
    (k) Cross-jurisdictional liabilities means total cross-
jurisdictional liabilities, as reported by the bank holding company on 
the FR Y-15.
    (l) Intra-financial system assets means total intra-financial 
system assets, as reported by the bank holding company on the FR Y-15.

[[Page 49106]]

    (m) Intra-financial system liabilities means total intra-financial 
system liabilities, as reported by the bank holding company on the FR 
Y-15.
    (n) Level 1 liquid asset is an asset that qualifies as a level 1 
liquid asset pursuant to 12 CFR 249.20(a).
    (o) Level 2A liquid asset is an asset that qualifies as a level 2A 
liquid asset pursuant to 12 CFR 249.20(b).
    (p) Level 2B liquid asset is an asset that qualifies as a level 2B 
liquid asset pursuant to 12 CFR 249.20(c).
    (q) Level 3 assets means assets valued using Level 3 measurement 
inputs, as reported by the bank holding company on the FR Y-15.
    (r) Notional amount of over-the-counter (OTC) derivatives means the 
total notional amount of OTC derivatives, as reported by the bank 
holding company on the FR Y-15.
    (s) Operational deposit has the meaning set forth in 12 CFR 249.3.
    (t) Payments activity means payments activity, as reported by the 
bank holding company on the FR Y-15.
    (u) Retail customer or counterparty has the meaning set forth in 12 
CFR 249.3.
    (v) Secured funding transaction has the meaning set forth in 12 CFR 
249.3.
    (w) Securities outstanding means total securities outstanding, as 
reported by the bank holding company on the FR Y-15.
    (x) Short position means a transaction in which a bank holding 
company has borrowed or otherwise obtained a security from a 
counterparty and sold that security, and the bank holding company must 
return the security to the initial counterparty in the future.
    (y) Systemic indicator includes the following indicators included 
on the FR Y-15:
    (1) Total exposures;
    (2) Intra-financial system assets;
    (3) Intra-financial system liabilities;
    (4) Securities outstanding;
    (5) Payments activity;
    (6) Assets under custody;
    (7) Underwritten transactions in debt and equity markets;
    (8) Notional amount of over-the-counter (OTC) derivatives;
    (9) Trading and available-for-sale (AFS) securities;
    (10) Level 3 assets;
    (11) Cross-jurisdictional claims; or
    (12) Cross-jurisdictional liabilities.
    (z) Total exposures means total exposures as reported by the bank 
holding company on the FR Y-15.
    (aa) Trading and AFS securities means total adjusted trading and 
available-for-sale securities as reported by the bank holding company 
on the FR Y-15.
    (bb) Underwritten transactions in debt and equity markets means 
total underwriting activity as reported by the bank holding company on 
the FR Y-15.
    (cc) Unsecured wholesale funding has the meaning set forth in 12 
CFR 249.3.
    (dd) Wholesale customer or counterparty has the meaning set forth 
in 12 CFR 249.3.


Sec.  217.402  Identification as a global systemically important BHC.

    A bank holding company is a global systemically important BHC if 
its method 1 score, as calculated under Sec.  217.404, equals or 
exceeds 130 basis points. Subject to Sec.  217.400(b)(2), a bank 
holding company must calculate its method 1 score on an annual basis by 
December 31 of each year.


Sec.  217.403  GSIB surcharge.

    (a) General. Subject to Sec.  217.400(b)(2), a company identified 
as a global systemically important BHC pursuant to Sec.  217.402 must 
calculate its GSIB surcharge on an annual basis by December 31 of each 
year. For any given year, subject to paragraph (d) of this section, the 
GSIB surcharge is equal to the greater of:
    (1) The method 1 surcharge calculated in accordance with paragraph 
(b) of this section; and
    (2) The method 2 surcharge calculated in accordance with paragraph 
(c) of this section.
    (b) Method 1 surcharge--(1) General. The method 1 surcharge of a 
global systemically important BHC is the amount set forth in Table 1 of 
this section that corresponds to the global systemically important 
BHC's method 1 score, calculated pursuant to Sec.  217.404.

              Table 1 to Sec.   217.403--Method 1 Surcharge
------------------------------------------------------------------------
              Method 1 score                     Method 1 surcharge
------------------------------------------------------------------------
Below 130.................................  0.0 percent.
130--229..................................  1.0 percent.
230--329..................................  1.5 percent.
330--429..................................  2.0 percent.
430--529..................................  2.5 percent.
530--629..................................  3.5 percent.
------------------------------------------------------------------------

    (2) Higher method 1 surcharges. To the extent that the method 1 
score of a global systemically important BHC equals or exceeds 630 
basis points, the method 1 surcharge equals the sum of:
    (i) 4.5 percent; and
    (ii) An additional 1.0 percent for each 100 basis points that the 
global systemically important BHC's score exceeds 630 basis points.
    (c) Method 2 surcharge--(1) General. The method 2 surcharge of a 
global systemically important BHC is the amount set forth in Table 2 of 
this section that corresponds to the global systemically important 
BHC's method 2 score, calculated pursuant to Sec.  217.405.

              Table 2 to Sec.   217.403: Method 2 Surcharge
------------------------------------------------------------------------
              Method 2 score                     Method 2 surcharge
------------------------------------------------------------------------
Below 130.................................  0.0 percent.
130--229..................................  1.0 percent.
230--329..................................  1.5 percent.
330--429..................................  2.0 percent.
430--529..................................  2.5 percent.
530--629..................................  3.0 percent.
630--729..................................  3.5 percent.
730--829..................................  4.0 percent.
830--929..................................  4.5 percent.
930--1029.................................  5.0 percent.
1030--1129................................  5.5 percent.
------------------------------------------------------------------------

    (2) Higher method 2 surcharges. To the extent that the method 2 
score of a global systemically important BHC equals or exceeds 1130 
basis points, the method 2 surcharge equals the sum of:
    (i) 6.5 percent; and
    (ii) An additional 0.5 percent for each 100 basis points that the 
global systemically important BHC's score exceeds 1130 basis points.
    (d) Effective date of an adjusted GSIB surcharge--(1) Increase in 
GSIB surcharge. An increase in the GSIB surcharge of a global 
systemically important BHC will take effect (i.e., be incorporated into 
the maximum payout ratio under Table 1 to Sec.  217.11) on January 1 of 
the year that is one full calendar year after the increased GSIB 
surcharge was calculated.
    (2) Decrease in GSIB surcharge. A decrease in the GSIB surcharge of 
a global systemically important BHC will take effect (i.e., be 
incorporated into the maximum payout ratio under Table 1 to Sec.  
217.11) on January 1 of the year immediately following the calendar 
year in which the decreased GSIB surcharge was calculated.


Sec.  217.404  Method 1 score.

    (a) General. A bank holding company's method 1 score is the sum of 
its systemic indicator scores for the twelve systemic indicators set 
forth Table 1 of this section, as determined under paragraph (b) of 
this section.
    (b) Systemic indicator score. (1) Except as provided in paragraph 
(b)(2) of this section, the systemic indicator score in basis points 
for a given systemic indicator is equal to:
    (i) The ratio of:
    (A) The amount of that systemic indicator, as reported on the bank 
holding company's most recent FR Y-15; to
    (B) The aggregate global indicator amount for that systemic 
indicator

[[Page 49107]]

published by the Board in the fourth quarter of that year;
    (ii) Multiplied by 10,000; and
    (iii) Multiplied by the indicator weight corresponding to the 
systemic indicator as set forth in Table 1 of this section.
    (2) Maximum substitutability score. The sum of the systemic 
indicator scores for the indicators in the substitutability category 
(assets under custody, payments systems activity, and underwriting 
activity) will not exceed 100 basis points.

          Table 1 to Sec.   217.404--Systemic Indicator Weights
------------------------------------------------------------------------
           Category               Systemic indicator    Indicator weight
------------------------------------------------------------------------
Size..........................  Total exposures.......  20 percent.
Interconnectedness............  Intra-financial system  6.67 percent.
                                 assets.
                                Intra-financial system  6.67 percent.
                                 liabilities.
                                Securities outstanding  6.67 percent.
Substitutability..............  Payments activity.....  6.67 percent.
                                Assets under custody..  6.67 percent.
                                Underwritten            6.67 percent.
                                 transactions in debt
                                 and equity markets.
Complexity....................  Notional amount of      6.67 percent.
                                 over-the-counter
                                 (OTC) derivatives.
                                Trading and available-  6.67 percent.
                                 for-sale (AFS)
                                 securities.
                                Level 3 assets........  6.67 percent.
Cross-jurisdictional activity.  Cross-jurisdictional    10 percent.
                                 claims.
                                Cross-jurisdictional    10 percent.
                                 liabilities.
------------------------------------------------------------------------

Sec.  217.405  Method 2 score.

    (a) General. A global systemically important BHC's method 2 score 
is equal to:
    (1) The sum of:
    (i) The global systemically important BHC's systemic indicator 
scores for the nine systemic indicators set forth Table 1 of this 
section, as determined under paragraph (b) of this section; and
    (ii) The global systemically important BHC's short-term wholesale 
funding score, calculated pursuant to Sec.  217.406.
    (b) Systemic indicator score. A global systemically important BHC's 
score for a systemic indicator is equal to:
    (1) The amount of the systemic indicator, as reported on the global 
systemically important BHC's most recent FR Y-15;
    (2) Multiplied by the coefficient corresponding to the systemic 
indicator set forth in Table 1 of this section.

     Table 1 to Sec.   217.405--Coefficients for Systemic Indicators
------------------------------------------------------------------------
                                                       Coefficient value
           Category               Systemic indicator          (%)
------------------------------------------------------------------------
Size..........................  Total exposures......              4.423
Interconnectedness............  Intra-financial                   12.007
                                 system assets.
                                Intra-financial                   12.490
                                 system liabilities.
                                Securities                         9.056
                                 outstanding.
Complexity....................  Notional amount of                 0.155
                                 over-the-counter
                                 (OTC) derivatives.
                                Trading and available-            30.169
                                 for-sale (AFS)
                                 securities.
                                Level 3 assets.......            161.177
Cross-jurisdictional activity.  Cross-jurisdictional               9.277
                                 claims.
                                Cross-jurisdictional               9.926
                                 liabilities.
------------------------------------------------------------------------

Sec.  217.406  Short-term wholesale funding score.

    (a) General. Except as provided in Sec.  217.400(b)(3)(ii), a 
global systemically important BHC's short-term wholesale funding score 
is equal to:
    (1) The average of the global systemically important BHC's weighted 
short-term wholesale funding amount (defined in paragraph (b) of this 
section);
    (2) Divided by the global systemically important BHC's average 
risk-weighted assets; and
    (3) Multiplied by a fixed factor of 350.
    (b) Weighted short-term wholesale funding amount. (1) To calculate 
its weighted short-term wholesale funding amount, a global systemically 
important BHC must calculate the amount of its short-term wholesale 
funding on a consolidated basis for each business day of the previous 
calendar year and weight the components of short-term wholesale funding 
in accordance with Table 1 of this section.
    (2) Short-term wholesale funding includes the following components, 
each as defined in paragraph (c) of this section:
    (i) All funds that the bank holding company must pay under each 
secured funding transaction, other than an operational deposit, with a 
remaining maturity of 1 year or less;
    (ii) All funds that the bank holding company must pay under all 
unsecured wholesale funding, other than an operational deposit, with a 
remaining maturity of 1 year or less;
    (iii) The fair value of an asset as determined under GAAP that a 
bank holding company must return under a covered asset exchange with a 
remaining maturity of 1 year or less;
    (iv) The fair value of an asset as determined under GAAP that the 
bank holding company must return under a short position to the extent 
that the borrowed asset does not qualify as a Level 1 liquid asset or a 
Level 2A liquid asset; and
    (v) All brokered deposits held at the bank holding company provided 
by a retail customer or counterparty.
    (3) For purposes of calculating the short-term wholesale funding 
amount and the components thereof, a bank holding company must assume 
that each asset or transaction described in paragraph (b)(2) of this 
section matures in accordance with the criteria set forth in 12 CFR 
249.31.

[[Page 49108]]



                 Table 1 to Sec.   217.406--Short-Term Wholesale Funding Components and Weights
----------------------------------------------------------------------------------------------------------------
                                       Remaining
     Component of short-term        maturity of  30        Remaining           Remaining           Remaining
        wholesale funding          days of less  or   maturity of  31 to  maturity of  91 to   maturity of  181
                                      no maturity           90 days            180 days           to 365 days
----------------------------------------------------------------------------------------------------------------
Category 1......................  25 percent........  10 percent........  0 percent.........  0 percent.
    (1) Secured funding
     transaction secured by a
     level 1 liquid asset;
    (2) Unsecured wholesale
     funding where the customer
     or counterparty is not a
     financial sector entity or
     a consolidated subsidiary
     thereof;
    (3) Brokered deposits
     provided by a retail
     customer or counterparty;
     and
    (4) Short positions where
     the borrowed asset does not
     qualify as either a level 1
     liquid asset or level 2A
     liquid asset.
Category 2......................  50 percent........  25 percent........  10 percent........  0 percent.
    (1) Secured funding
     transaction secured by a
     level 2A liquid asset; and
    (2) Covered asset exchanges
     involving the future
     exchange of a Level 1
     liquid asset for a Level 2A
     liquid asset.
Category 3......................  75 percent........  50 percent........  25 percent........  10 percent.
    (1) Secured funding
     transaction secured by a
     level 2B liquid asset;
    (2) Covered asset exchanges
     (other than those described
     in Category 2); and
    (3) Unsecured wholesale
     funding (other than
     unsecured wholesale funding
     described in Category 1).
Category 4......................  100 percent.......  75 percent........  50 percent........  25 percent.
    Any other component of short-
     term wholesale funding.
----------------------------------------------------------------------------------------------------------------


    Note: The following Appendix will not appear in the Code of 
Federal Regulations.

Appendix

Calibrating the GSIB Surcharge

Abstract

    This white paper discusses how to calibrate a capital surcharge 
that tracks the systemic footprint of a global systemically 
important bank holding company (GSIB). There is no widely accepted 
calibration methodology for determining such a surcharge. The white 
paper focuses on the ``expected impact'' framework, which is based 
on each GSIB's expected impact on the financial system, understood 
as the harm it would cause to the financial system were it to fail 
multiplied by the probability that it will fail. Because a GSIB's 
failure would cause more harm than the failure of a non-GSIB, a GSIB 
should hold enough capital to lower its probability of failure so 
that its expected impact is approximately equal to that of a non-
GSIB.
    Applying the expected impact framework requires several 
elements. First, it requires a method for measuring the relative 
harm that a given banking firm's failure would cause to the 
financial system--that is, its systemic footprint. This white paper 
uses the two methods as set forth in the GSIB surcharge rule to 
quantify a firm's systemic impact. Those methods look to attributes 
of a firm that are drivers of its systemic importance, such as size, 
interconnectedness, and cross-border activity. Both methodologies 
use the most recent data available, and firms' scores will change 
over time as their systemic footprints change. Second, the expected 
impact framework requires a means of estimating the probability that 
a firm with a given level of capital will fail. This white paper 
estimates that relationship using historical data on the probability 
that a large U.S. banking firm will experience losses of various 
sizes. Third, the expected impact framework requires the choice of a 
``reference'' bank holding company: A large, non-GSIB banking firm 
whose failure would not pose an outsized risk to the financial 
system. This white paper discusses several plausible choices of 
reference BHC.
    With these elements, it is possible to estimate a capital 
surcharge that would reduce a GSIB's expected impact to that of a 
non-GSIB reference BHC. For each choice of reference BHC, the white 
paper provides the ranges of reasonable surcharges for each U.S. 
GSIB.

Introduction

    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
\68\ mandates that the Board of Governors of the Federal Reserve 
System adopt, among other prudential measures, enhanced capital 
standards to mitigate the risk posed to financial stability by 
systemically important financial institutions (SIFIs). The Board has 
already implemented a number of measures designed to strengthen 
firms' capital positions in a manner consistent with the Dodd-Frank 
Act's requirement that such measures increase in stringency based on 
the systemic importance of the firm.
---------------------------------------------------------------------------

    \68\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
---------------------------------------------------------------------------

    As part of this process, the Board has proposed a set of capital 
surcharges to be applied to the eight U.S. bank holding companies 
(BHCs) of the greatest systemic importance, which have been 
denominated global systemically important bank holding companies 
(GSIBs). Setting such an enhanced capital standard entails (1) 
measuring the risk that a given GSIB's failure poses to financial 
stability (that is, the GSIB's systemic footprint) and (2) 
estimating how much additional capital is needed to mitigate the 
systemic risk posed by a firm with a given systemic footprint.
    This white paper explains the calibration of the capital 
surcharges, based on the measures of each GSIB's systemic footprint 
derived from the two methods described in the GSIB surcharge final 
rule and discussed in detail in the preamble to the rule. Because 
there is no single widely accepted framework for calibrating a GSIB 
surcharge, the Board considered several potential approaches. This 
paper focuses on the ``expected impact'' framework, which is the 
most appropriate approach for helping to scale the level of a 
capital surcharge. This paper explains the expected impact framework 
in detail. It provides surcharge calibrations resulting from that 
framework under a range of plausible assumptions, incorporating the 
uncertainty that is inherent in the study of rare events such as 
systemic banking failures. This paper also discusses, at a high 
level, two alternative calibration frameworks, and it explains why 
neither seemed as useful as a framework for the calibration of the 
GSIB surcharge.

Background

    The failures and near-failures of SIFIs were key drivers of the 
2007-08 financial crisis and the resulting recession. They were also 
key drivers of the public-sector response to the crisis, in which 
the United States government sought to prevent SIFI failures through 
extraordinary measures such as the Troubled Asset Relief Program. 
The experience of the crisis made clear that the

[[Page 49109]]

failure of a SIFI during a period of stress can do great damage to 
financial stability, that SIFIs themselves lack sufficient 
incentives to take precautions against their own failures, that 
reliance on extraordinary government interventions going forward 
would invite moral hazard and lead to competitive distortions, and 
that the pre-crisis regulatory focus on microprudential risks to 
individual financial firms needed to be broadened to include threats 
to the overall stability of the financial system.
    In keeping with these lessons, post-crisis regulatory reform has 
placed great weight on ``macroprudential'' regulation, which seeks 
to address threats to financial stability. Section 165 of the Dodd-
Frank Act pursues this goal by empowering the Board to establish 
enhanced regulatory standards for ``large, interconnected financial 
institutions'' that ``are more stringent than the standards . . . 
applicable to [financial institutions] that do not present similar 
risks to the financial stability of the United States'' and 
``increase in stringency'' in proportion to the systemic importance 
of the financial institution in question.\69\ Section 
165(b)(1)(A)(i) of the act points to risk-based capital requirements 
as a required type of enhanced regulatory standard for SIFIs.
---------------------------------------------------------------------------

    \69\ Section 165(a)(1).
---------------------------------------------------------------------------

Rationales for a GSIB Surcharge

    The Dodd-Frank Act's mandate that the Board adopt enhanced 
capital standards to mitigate the risk posed to financial stability 
by certain large financial institutions provides the principal 
statutory impetus for enhanced capital requirements for SIFIs. 
Because the failure of a SIFI could undermine financial stability 
and thus cause far greater negative externalities than could the 
failure of a financial institution that is not systemically 
important, a probability of default that would be acceptable for a 
non-systemic firm may be unacceptably high for a SIFI. Reducing the 
probability that a SIFI will default reduces the risk to financial 
stability. The most straightforward means of lowering a financial 
firm's probability of default is to require it to hold a higher 
level of capital relative to its risk-weighted assets than non-SIFIs 
are required to hold, thereby enabling it to absorb greater losses 
without becoming insolvent.
    There are also two secondary rationales for enhanced capital 
standards for SIFIs. First, higher capital requirements create 
incentives for SIFIs to shrink their systemic footprint, which 
further reduces the risks these firms pose to financial stability. 
Second, higher capital requirements may offset any funding advantage 
that SIFIs have on account of being perceived as ``too big to 
fail,'' which reduces the distortion in market competition caused by 
the perception and the potential that counterparties may 
inappropriately shift more risk to SIFIs, thereby increasing the 
risk those firms pose to the financial system. Increased capital 
makes GSIBs more resilient in times of economic stress, and, by 
increasing the capital cushion available to the firm, may afford the 
firm and supervisors more time to address weaknesses at the firm 
that could reverberate through the financial system were the firm to 
fail.

The Expected Impact Framework

    By definition, a GSIB's failure would cause greater harm to 
financial stability than the failure of a banking organization that 
is not a GSIB.\70\ Thus, if all banking organizations are subject to 
the same risk-based capital requirements and have similar 
probabilities of default, GSIBs will impose far greater systemic 
risks than non-GSIBs will. The expected impact framework addresses 
this discrepancy by subjecting GSIBs to capital surcharges that are 
large enough that the expected systemic loss from the failure of a 
given GSIB better approximates the expected systemic loss from the 
failure of a BHC that is large but is not a GSIB. (We will call this 
BHC the ``reference BHC.'')
---------------------------------------------------------------------------

    \70\ Cf. Dodd-Frank Act section 165(a)(1), which instructs the 
Board to apply more stringent prudential standards to certain large 
financial firms ``[i]n order to prevent or mitigate risks to the 
financial stability of the United States that could arise from the 
material financial distress or failure . . . of large, 
interconnected financial institutions.'' As illustrated by the 
financial crisis that led Congress to enact the Dodd-Frank Act, 
financial instability can lead to a wide range of social harms, 
including the declines in employment and GDP growth that are 
associated with an economic recession.
---------------------------------------------------------------------------

    The expected loss from a given firm's failure can be computed as 
the systemic losses that would occur if that firm failed, discounted 
by the probability of its failure. Using the acronyms LGD (systemic 
loss given default), PD (probability of default), and EL (expected 
loss), this idea can be expressed as follows:

EL = LGD * PD

    The goal of a GSIB surcharge is to equalize the expected loss 
from a GSIB's failure to the expected loss from the failure of a 
non-GSIB reference BHC:

ELGSIB = ELr

    By definition, a GSIB's LGD is higher than that of a non-GSIB. 
So to equalize EL between GSIBs and non-GSIBs, we must require each 
GSIB to lower its PD, which we can do by requiring it to hold more 
capital.
    This implies that a GSIB must increase its capital level to the 
extent necessary to reach a PD that is as many times lower than the 
PD of the reference BHC as its LGD is higher than the LGD of the 
reference BHC. (For example, suppose that a particular GSIB's 
failure would cause twice as much loss as the failure of the 
reference BHC. In that case, to equalize EL between the two firms, 
we must require the GSIB to hold enough additional capital that its 
PD is half that of the reference BHC.) That determination requires 
the following components, which we will consider in turn:

1. A method for creating ``LGD scores'' that quantify the GSIBs' 
LGDs
2. An LGD score for the reference BHC
3. A function relating a firm's capital ratio to its PD

Quantifying GSIB LGDs

    The final rule employs two methods to measure GSIB LGD:
     Method 1 is based on the internationally accepted GSIB 
surcharge framework, which produces a score derived from a firm's 
attributes in five categories: Size, interconnectedness, complexity, 
cross-jurisdictional activity, and substitutability.
     Method 2 replaces method 1's substitutability category 
with a measure of a firm's reliance on short-term wholesale funding.
    The preambles to the GSIB surcharge notice of proposed 
rulemaking and final rule explain why these categories serve as 
proxies for the systemic importance of a banking organization (and 
thus the systemic harm that its failure would cause). They also 
explain how the categories are weighted to produce scores under 
method 1 and method 2. Table 1 conveys the Board's estimates of the 
current scores for the eight U.S. BHCs with the highest scores. 
These scores are estimated from the most recent available data on 
firm-specific indicators of systemic importance. The actual scores 
that will apply when the final rule takes effect may be different 
and will depend on the future evolution of the firm-specific 
indicator values.

               Table 1--Top Eight Scores Under Each Method
------------------------------------------------------------------------
                                                     Method 1   Method 2
                       Firm                           score      score
------------------------------------------------------------------------
JPMorgan Chase....................................        473        857
Citigroup.........................................        409        714
Bank of America...................................        311        559
Goldman Sachs.....................................        248        585
Morgan Stanley....................................        224        545
Wells Fargo.......................................        197        352
Bank of New York Mellon...........................        149        213
State Street......................................        146        275
------------------------------------------------------------------------
Note: These estimates are based on data sources described below. They
  may not reflect the actual scores of a given firm. Method 1 estimates
  were produced using indicator data reported by firms on the FR Y-15 as
  of December 31, 2014, and global aggregate denominators reported by
  the Basel Committee on Banking Supervision (BCBS) as of December 31,
  2013. Method 2 estimates were produced using the same indicator data
  and the average of the global aggregate denominators reported by the
  BCBS as of the ends of 2012 and 2013. For the eight U.S. BHCs with the
  highest scores, the short-term wholesale funding component of method 2
  was estimated using liquidity data collected through the supervisory
  process and averaged across 2014. Unless otherwise specified, these
  data sources were used to estimate all method 1 and method 2 scores
  included in this paper.

    This paper assumes that the relationships between the scores 
produced by these methods and the firms' systemic LGDs are linear. 
In other words, it assumes that if firm A's score is twice as high 
as firm B's score, then the systemic harms that would flow from firm 
A's failure would be twice as great as those that would flow from 
firm B's failure.
    In fact, there is reason to believe that firm A's failure would 
do more than twice as much damage as firm B's. (In other words, 
there is reason to believe that the function relating the scores to 
systemic LGD increases at an increasing rate and is therefore non-
linear.) The reason is that at least some of the

[[Page 49110]]

components of the two methods appear to increase the systemic harms 
that would result from a default at an increasing rate, while none 
appears to increase the resulting systemic harm at a decreasing 
rate. For example, because the negative price impact associated with 
the fire-sale liquidation of certain asset portfolios increases with 
the size of the portfolio, systemic LGD appears to grow at an 
increasing rate with the size, complexity, and short-term wholesale 
funding metrics used in the methods. Thus, this paper's assumption 
of a linear relationship simplifies the analysis while likely 
resulting in surcharges lower than those that would result if the 
relationship between scores and systemic LGD were assumed to be non-
linear.

The Reference BHC's Systemic LGD Score

    The reference BHC is a real or hypothetical BHC whose LGD will 
be used in our calculations. The expected impact framework requires 
that the reference BHC be a non-GSIB, but it leaves room for 
discretion as to the reference BHC's identity and LGD score.

Potential Approaches

    The reference BHC score can be viewed as simply the LGD score 
which, given the PD associated with the generally applicable capital 
requirements, produces the highest EL that is consistent with the 
purposes and mandate of the Dodd-Frank Act. The effect of setting 
the reference BHC score to that LGD score would be to hold all GSIBs 
to that EL level. The purpose of the Dodd-Frank Act is ``to prevent 
or mitigate risks to the financial stability of the United States 
that could arise from the material financial distress or failure, or 
ongoing activities, of large, interconnected financial 
institutions.'' \71\ The following options appear to be conceptually 
plausible ways of identifying the reference BHC for purposes of 
establishing a capital requirement for GSIBs that lowers the 
expected loss from the failure of a GSIB to the level associated 
with the failure of a non-GSIB.
---------------------------------------------------------------------------

    \71\ Section 165(a)(1).
---------------------------------------------------------------------------

    Option 1: A BHC with $50 billion in assets. Section 165(a)(1) of 
the Dodd-Frank Act calls for the Board to ``establish prudential 
standards for . . . bank holding companies with total consolidated 
assets equal to or greater than $50,000,000,000 that (A) are more 
stringent than the standards . . . applicable to . . . bank holding 
companies that do not present similar risks to the financial 
stability of the United States; and (B) increase in stringency.'' 
Section 165 is the principal statutory basis for the GSIB surcharge, 
and its $50 billion figure provides a line below which it may be 
argued that Congress did not believe that BHCs present sufficient 
``risks to the financial stability of the United States'' to warrant 
mandatory enhanced prudential standards. It would therefore be 
reasonable to require GSIBs to hold enough capital to reduce their 
expected systemic loss to an amount equal to that of a $50 billion 
BHC that complies with the generally applicable capital rules. 
Although $50 billion BHCs could have a range of LGD scores based 
upon their other attributes, reasonable score estimates for a BHC of 
that size are 3 under method 1 and 37 under method 2.\72\
---------------------------------------------------------------------------

    \72\ These estimates were produced by plotting the estimated 
scores of six U.S. BHCs with total assets between $50 billion and 
$100 billion against their total assets, running a linear 
regression, and finding the score implied by the regression for a 
$50 billion firm. These firms' scores were estimated using data from 
the sources described in the general note to table 1, except that 
figures for the short-term wholesale funding component of method 2 
were estimated using FR Y-9C data from the first quarter of 2015 and 
Federal Reserve quantitative impact study (QIS) data as of the 
fourth quarter of 2014. Scores for firms with total assets below $50 
billion were not estimated (and therefore were not included in the 
regression analysis) because the Federal Reserve does not collect as 
much data from those firms.
---------------------------------------------------------------------------

    Option 2: A BHC with $250 billion in assets. The Board's 
implementation of the advanced approaches capital framework imposes 
enhanced requirements on banking organizations with at least $250 
billion in consolidated assets. This level distinguishes the largest 
and most internationally active U.S. banking organizations, which 
are subject to other enhanced capital standards, including the 
countercyclical capital buffer and the supplementary leverage 
ratio.\73\ The $250 billion threshold therefore provides another 
viable line for distinguishing between the large, complex, 
internationally active banking organizations that pose a substantial 
threat to financial stability and those that do not pose such a 
substantial threat. Although $250 billion BHCs could have a range of 
LGD scores based upon their other attributes, reasonable score 
estimates for a BHC of that size are 23 under method 1 and 60 under 
method 2.\74\
---------------------------------------------------------------------------

    \73\ Advanced approaches banking organizations also include 
firms with on-balance sheet foreign exposures of $10 billion or 
more.
    \74\ These estimates were produced by applying the approach 
described in footnote 5 to 10 U.S BHCs with total assets between 
$100 billion and $400 billion. Bank of New York Mellon and State 
Street, which have total assets within that range, were excluded 
from the sample because they are GSIBs and the expected impact 
framework assumes that the reference BHC is a non-GSIB.
---------------------------------------------------------------------------

    Option 3: The U.S. non-GSIB with the highest LGD score. Another 
plausible reference BHC is the actual U.S. non-GSIB BHC that comes 
closest to being a GSIB--in other words, the U.S. non-GSIB with the 
highest LGD score. Under method 1, the highest score for a U.S. non-
GSIB is 51 (the second-highest is 39). Under method 2, the highest 
score for a U.S. non-GSIB is estimated to be 85 (the second- and 
third-highest scores are both estimated to be 75).\75\
---------------------------------------------------------------------------

    \75\ These estimates were produced using data from the sources 
described in the general note to table 1, except that figures for 
the short-term wholesale funding component of method 2 were 
estimated using FR Y-9C data from the first quarter of 2015 and 
Federal Reserve quantitative impact study (QIS) data as of the 
fourth quarter of 2014.
---------------------------------------------------------------------------

    Option 4: A hypothetical BHC at the cut-off line between GSIBs 
and non-GSIBs. Given that BHCs are divided into GSIBs and non-GSIBs 
based on their systemic footprint and that LGD scores provide our 
metric for quantifying firms' systemic footprints, there must be 
some LGD score under each method that marks the ``cut-off line'' 
between GSIBs and non-GSIBs. The reference BHC's score should be no 
higher than this cut-off line, since the goal of the expected impact 
framework is to lower each GSIB's EL so that it equals the EL of a 
non-GSIB. Under this option, the reference BHC's score should also 
be no lower than the cut-off line, since if it were lower, then a 
non-GSIB firm could exist that had a higher LGD and therefore 
(because it would not be subject to a GSIB surcharge) a higher EL 
than GSIBs are permitted to have. Under this reasoning, the 
reference BHC should have an LGD score that is exactly on the cut-
off line between GSIBs and non-GSIBs. That is, it should be just on 
the cusp of being a GSIB.
    What LGD score marks the cut-off line between GSIB and non-GSIB? 
With respect to method 1, figure 1 shows that there is a large drop-
off between the eighth-highest score (146) and the ninth-highest 
score (51). Drawing the cut-off line within this target range is 
reasonable because firms with scores at or below 51 are much closer 
in size and complexity to financial firms that have been resolved in 
an orderly fashion than they are to the largest financial firms, 
which have scores between three and nine times as high and are 
significantly larger and more complex. We will choose a cut-off line 
at 130, which is at the high end of the target range. This choice is 
appropriate because it aligns with international standards and 
facilitates comparability among jurisdictions. It also establishes 
minimum capital surcharges that are consistent internationally.

[[Page 49111]]

[GRAPHIC] [TIFF OMITTED] TR14AU15.065

    A similar approach can be used under method 2. Figure 2 depicts 
the estimated method 2 scores of the eleven U.S. BHCs with the 
highest estimated scores. A large drop-off in the distribution of 
scores with a significant difference in character of firms occurs 
between firms with scores above 200 and firms with scores below 100.
    The range between Bank of New York Mellon and the next-highest-
scoring firm is the most rational place to draw the line between 
GSIBs and non-GSIBs: Bank of New York Mellon's score is roughly 251 
percent of the score of the next highest-scoring firm, which is 
labeled BHC A. (There is also a large gap between Morgan Stanley's 
score and Wells Fargo's, but the former is only about 154 percent of 
the latter.) This approach also generates the same list of eight 
U.S. GSIBs as is produced by method 1. In selecting a specific line 
within this range, we considered the statutory mandate to protect 
U.S. financial stability, which argues for a method of calculating 
surcharges that addresses the importance of mitigating the failure 
of U.S. GSIBs, which are among the most systemic in the world. This 
would suggest a cut-off line at the lower end of the target range. 
The lower threshold is appropriate in light of the fact that method 
2 uses a measure of short-term wholesale funding in place of 
substitutability. Specifically, short-term wholesale funding is 
believed to have particularly strong contagion effects that could 
more easily lead to major systemic events, both through the freezing 
of credit markets and through asset fire sales. These systemic 
impacts support the choice of a threshold at the lower end of the 
range for method 2.

[[Page 49112]]

[GRAPHIC] [TIFF OMITTED] TR14AU15.066

    Although the failure of a firm with the systemic footprint of 
BHC A poses a smaller risk to financial stability than does the 
failure of one of the eight GSIBs, it is nonetheless possible that 
the failure of a very large banking organization like BHC A, BHC B, 
or BHC C could have a negative effect on financial stability, 
particularly during a period of industry-wide stress such as 
occurred during the 2007-08 financial crisis. This provides 
additional support for our decision to draw the line between GSIBs 
and non-GSIBs at 100 points, at the lower end of the range between 
Bank of New York Mellon and BHC A.
    Note that we have set our method 2 reference BHC score near the 
bottom of the target range and our method 1 reference BHC score near 
the top of the target range. Due to the choice of reference BHC in 
method 2, method 2 is likely to result in higher surcharges than 
method 1. Calculating surcharges under method 1 in part recognizes 
the international standards applied globally to GSIBs. Using a 
globally consistent approach for establishing a baseline surcharge 
has benefits for the stability of the entire financial system, which 
is globally interconnected. At the same time, using an approach that 
results in higher surcharges for most GSIBs is consistent with the 
statutory mandate to protect financial stability in the United 
States and with the risks presented by short-term wholesale funding.

Capital and Probability of Default

    To implement the expected impact approach, we also need a 
function that relates capital ratio increases to reductions in 
probability of default. First, we use historical data drawn from FR 
Y-9C regulatory reports from the second quarter of 1987 through the 
fourth quarter of 2014 to plot the probability distribution of 
returns on risk-weighted assets (RORWA) for the 50 largest BHCs 
(determined as of each quarter), on a four-quarter rolling 
basis.\76\ RORWA is defined as after-tax net income divided by risk-
weighted assets. Return on risk-weighted assets provides a better 
measure of risk than return on total assets would, because the risk 
weightings have been calibrated to ensure that two portfolios with 
the same risk-weighted assets value contain roughly the same amount 
of risk, whereas two portfolios with total assets of the same value 
can contain very different amounts of risk depending on the asset 
classes in question.
---------------------------------------------------------------------------

    \76\ Because Basel I risk-weighted assets data are only 
available from 1996 onward, risk-weighted assets data for earlier 
years are estimated by back-fitting the post-1996 ratio between 
risk-weighted assets and total assets onto pre-1996 total assets 
data. See Andrew Kuritzkes and Til Schuermann (2008), ``What We 
Know, Don't Know, and Can't Know about Bank Risk: A View from the 
Trenches,'' University of Pennsylvania, Financial Institutions 
Center paper #06-05, http://fic.wharton.upenn.edu/fic/papers/06/0605.pdf.
---------------------------------------------------------------------------

    We select this date range and set of firms to provide a large 
sample size while focusing on data from the relatively recent past 
and from very large firms, which are more germane to our purposes. 
Data from the past three decades may be an imperfect predictor of 
future trends, as there are factors that suggest that default 
probabilities in the future may be either lower or higher than would 
be predicted on the basis of the historical data.
    On the one hand, these data do not reflect many of the 
regulatory reforms implemented in the wake of the 2007-08 financial 
crisis that are likely to reduce the probability of very large 
losses and therefore the probability of default associated with a 
given capital level. For example, the Basel 2.5 and Basel III 
capital reforms are intended to increase the risk-sensitivity of the 
risk weightings used to measure risk-weighted assets, which suggests 
that the risk of losses associated with each dollar of risk-weighted 
assets under Basel III will be lower than the historical, pre-Basel 
III trend. Similarly, post-crisis liquidity initiatives (the 
liquidity coverage ratio and the net stable funding ratio) should 
reduce the default probabilities of large banking firms and the 
associated risk of fire sales. Together, these reforms may lessen a 
GSIB's probability of default and potentially imply a lower GSIB 
surcharge.
    On the other hand, however, extraordinary government 
interventions during the time period of the dataset (particularly in 
response to the 2007-08 financial crisis) undoubtedly prevented or 
reduced large losses that many of the largest BHCs would otherwise 
have suffered. Because one core purpose of post-crisis reform is to 
avoid the need for such extraordinary interventions in the future, 
the GSIB surcharge should be calibrated using data that include the 
severe losses that would have materialized in the absence of such 
intervention; because the interventions in fact occurred, using 
historical RORWA data may lead us to underestimate the probability 
of default associated with a given capital level. In short, there 
are reasons to believe that the historical data underestimate the 
future trend, and there are reasons to believe that those data 
overestimate the future trend. Although the extent of the over- and 
underestimations cannot be rigorously quantified, a reasonable 
assumption is that they roughly cancel each other out.\77\
---------------------------------------------------------------------------

    \77\ The concept of risk aversion provides additional support 
for this assumption. While the failure of a GSIB in any given year 
is unlikely, the costs from such a failure to financial stability 
could be severe. By contrast, any costs from higher capital 
surcharges will be distributed more evenly among different states of 
the world. Presumably society is risk-averse and, in a close case, 
would prefer the latter set of costs to the former. While this paper 
does not attempt to incorporate risk aversion into its quantitative 
analysis, that concept does provide additional support for the 
decision not to discount the historical probability of large losses 
in light of post-crisis regulatory reforms.

---------------------------------------------------------------------------

[[Page 49113]]

    Figure 3 displays the estimated quantiles of ROWRA from 0.1 to 
5.0. The sample quantiles are represented by black dots. The dashed 
lines above and below the estimated quantiles represent a 99 percent 
confidence interval for each estimated quantile. As shown in the 
figure, the uncertainty around more extreme quantiles is 
substantially larger than that around less extreme quantiles. This 
is because actual events relating to more extreme quantiles occur 
much less frequently and are, as a result, subject to considerably 
more uncertainty. The solid line that passes through the black dots 
is an estimated regression function that relates the estimated value 
of the quantile to the natural logarithm of the associated 
probability. The specification of the regression function is 
provided in the figure which reports both the estimated coefficients 
of the regression function and the standard errors, in parentheses, 
associated with the estimated coefficients.
[GRAPHIC] [TIFF OMITTED] TR14AU15.067

    Figure 3 shows that RORWA is negative (that is, the firm 
experiences a loss) more than 5 percent of the time, with most 
losses amounting to less than 4 percent of risk-weighted assets. The 
formula for the logarithmic regression on this RORWA probability 
distribution (with RORWA represented by y and the percentile 
associated with that RORWA by x) is:

y = 2.18 * ln(x) - 4.36

    The inverse of this function, which we will label p(RORWA), 
gives the probability that a particular realization of RORWA, R will 
be less than or equal to a specified level over a given year. That 
function is:
[GRAPHIC] [TIFF OMITTED] TR14AU15.068

    Next, assume that a BHC becomes non-viable and consequently 
defaults if and only if its capital ratio k (measured in terms of 
common equity tier 1 capital, or CET1) falls to some failure point 
f. (Note that k is a variable and f is a constant.) We assume that 
RORWA and k are independent, which is appropriate because the return 
on an asset should not depend to a significant extent on the 
identity of the entity holding the asset or on that entity's capital 
ratio. We can now estimate the probability that a BHC with capital 
level k will suffer sufficiently severe losses (that is, a negative 
RORWA of sufficiently great magnitude) to bring its capital ratio 
down to the failure point f. We are looking for the probability that 
k will fall to f, that is, the probability that k + RORWA = f. 
Solving for RORWA, we get RORWA = f - k, which we can then plug into 
the function above to find the probability of default as a function 
of the capital ratio k: \78\
---------------------------------------------------------------------------

    \78\ This paper treats dollars of risk-weighted assets as 
equivalent regardless of whether they are measured under the risk 
weightings of Basel I or of Basel III. This treatment makes sense 
because the two systems produce roughly comparable results and there 
does not appear to be any objectively correct conversion factor for 
converting between them.
[GRAPHIC] [TIFF OMITTED] TR14AU15.079


[[Page 49114]]



Application

    We can now create a function that takes as its input a GSIB's 
LGD score and produces a capital surcharge for that GSIB. In the 
course of doing so, we will find that the resulting surcharges are 
invariant to both the failure point f and the generally applicable 
capital level that the GSIB surcharge is held on top of, which means 
that we do not need to make any assumption about the value of these 
two quantities. Recall that the goal of the expected impact 
framework is to make the following equation true:

ELGSIB = EL[gamma]

    Let kr be the generally applicable capital level held by the 
reference BHC, and let kGSIB be the GSIB surcharge that a given GSIB 
is required to hold on top of kr. Thus, the reference BHC's 
probability of default will be p(kr) and each GSIB's probability of 
default will be p(kr + kGSIB), with the value of kGSIB varying from 
firm to firm. Because EL = LGD * PD, the equation above can be 
expressed as:

LGDGSIB * p(k[gamma] + kGSIB) = LGD[gamma] * p(k[gamma])
[GRAPHIC] [TIFF OMITTED] TR14AU15.069

    The appropriate surcharge for a given GSIB depends only on that 
GSIB's LGD score and the chosen reference BHC's LGD score. Indeed, 
the surcharge does not even depend on the particular values of those 
two scores, but only on the ratio between them. Thus, doubling, 
halving, or otherwise multiplying both scores by the same constant 
will not affect the resulting surcharges. And since each of our 
reference BHC options was determined in relation to the LGD scores 
of actual firms, any multiplication applied to the calculation of 
the firms' LGD scores will also carry over to the resulting 
reference BHC scores.
    Note that the specific GSIB surcharge depends on the slope 
coefficient that determines how the quantiles of the RORWA 
distribution change as the probability changes. The empirical 
analysis presented in figure 3 suggests a value for the slope 
coefficient of roughly 2.18; however, there is uncertainty regarding 
the true population value of this coefficient. There are two 
important sources of uncertainty. First, the estimated value of 2.18 
is a statistical estimate that is subject to sampling uncertainty. 
This sampling uncertainty is characterized in terms of the standard 
error of the coefficient estimate, which is 0.11 (as reflected in 
parentheses beneath the point estimate in figure 3). Under standard 
assumptions, the estimated value of the slope coefficient is 
approximately normally distributed with a mean of 2.18 and a 
standard deviation of 0.11. A 99 percent confidence interval for the 
slope coefficient ranges from approximately 1.9 to 2.4.
    Second, there is additional uncertainty around the slope 
coefficient that arises from uncertainty as to whether the data 
sample used to construct the estimated slope coefficient is 
indicative of the RORWA distribution that will obtain in the future. 
As discussed above, there are reasons to believe that the future 
RORWA distribution will differ to some extent from the historical 
distribution. Accordingly, the 99 percent confidence interval for 
the slope coefficient that is presented above is a lower bound to 
the true degree of uncertainty that should be attached to the slope 
coefficient.
    We can now use the GSIB surcharge formula and 99 percent 
confidence interval presented above to compute the ranges of capital 
surcharges that would obtain for each of the reference BHC options 
discussed above. Table 2 presents method 1 surcharge ranges and 
table 3 presents method 2 surcharge ranges. The low estimate in each 
cell was computed using the surcharge formula above with the value 
of the slope coefficient at the low end of the 99 percent

[[Page 49115]]

confidence interval (1.9); the high end was computed using the value 
of the slope coefficient at the high end of that interval (2.4).

                                              Table 2--Method 1 Surcharge Ranges for Each Reference BHC (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 $50 Billion        $250 Billion      Non-GSIB with    Reference BHC LGD
                           Firm                              Method 1 score     reference BHC      reference BHC       highest LGD           = 130
--------------------------------------------------------------------------------------------------------------------------------------------------------
JPMorgan Chase...........................................                473          9.6, 12.4           5.7, 7.4           4.2, 5.5           2.5, 3.2
Citigroup................................................                409          9.3, 12.1           5.5, 7.1           4.0, 5.1           2.2, 2.8
Bank of America..........................................                311          8.8, 11.4           4.9, 6.4           3.4, 4.4           1.7, 2.1
Goldman Sachs............................................                248          8.4, 10.9           4.5, 5.8           3.0, 3.9           1.2, 1.6
Morgan Stanley...........................................                224          8.2, 10.6           4.3, 5.6           2.8, 3.6           1.0, 1.3
Wells Fargo..............................................                197          8.0, 10.3           4.1, 5.3           2.6, 3.3           0.8, 1.0
Bank of New York Mellon..................................                149           7.4, 9.6           3.6, 4.6           2.0, 2.6           0.3, 0.3
State Street.............................................                146           7.4, 9.6           3.5, 4.5           2.0, 2.6           0.2, 0.3
Reference score..........................................  .................                  3                 23                 51                130
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                              Table 3--Method 2 Surcharge Ranges for Each Reference BHC (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 $50 Billion        $250 Billion      Non-GSIB with    Reference BHC LGD
                           Firm                              Method 2 score     reference BHC      reference BHC       highest LGD           = 100
--------------------------------------------------------------------------------------------------------------------------------------------------------
JPMorgan Chase...........................................                857           6.0, 7.7           5.1, 6.5           4.4, 5.7           4.1, 5.3
Citigroup................................................                714           5.6, 7.3           4.7, 6.1           4.0, 5.2           3.7, 4.8
Goldman Sachs............................................                585           5.2, 6.8           4.3, 5.6           3.7, 4.7           3.4, 4.3
Bank of America..........................................                559           5.2, 6.7           4.2, 5.5           3.6, 4.6           3.3, 4.2
Morgan Stanley...........................................                545           5.1, 6.6           4.2, 5.4           3.5, 4.6           3.2, 4.2
Wells Fargo..............................................                352           4.3, 5.5           3.4, 4.4           2.7, 3.5           2.4, 3.1
State Street.............................................                275           3.8, 4.9           2.9, 3.7           2.2, 2.9           1.9, 2.5
Bank of New York Mellon..................................                213           3.3, 4.3           2.4, 3.1           1.7, 2.3           1.4, 1.9
Reference score..........................................  .................                 37                 60                 85                100
--------------------------------------------------------------------------------------------------------------------------------------------------------

Surcharge Bands

    The analysis above suggests a range of capital surcharges for a 
given LGD score. To obtain a simple and easy-to-implement surcharge 
rule, we will assign surcharges to discrete ``bands'' of scores so 
that the surcharge for a given score falls in the lower end of the 
range suggested by the results shown in tables 2 and 3. The bands 
will be chosen so that the surcharges for each band rise in 
increments of one half of a percentage point. This sizing will 
ensure that modest changes in a firm's systemic indicators will 
generally not cause a change in its surcharge, while at the same 
time maintaining a reasonable level of sensitivity to changes in a 
firm's systemic footprint. Because small changes in a firm's score 
will generally not cause a change to the firm's surcharge, using 
surcharge bands will facilitate capital planning by firms subject to 
the rule.
    We will omit the surcharge band associated with a 0.5 percent 
surcharge. This tailoring for the least-systemic band of scores 
above the reference BHC score is rational in light of the fixed 
costs of imposing a firm-specific capital surcharge; these costs are 
likely not worth incurring where only a small surcharge would be 
imposed. (The internationally accepted GSIB surcharge framework 
similarly lacks a 0.5 percent surcharge band.) Moreover, a minimum 
surcharge of 1.0 percent for all GSIBs accounts for the inability to 
know precisely where the cut-off line between a GSIB and a non-GSIB 
will be at the time when a failure occurs, and the surcharge's 
purpose of enhancing the resilience of all GSIBs.
    We will use 100-point fixed-width bands, with a 1.0 percent 
surcharge band at 130-229 points, a 1.5 percent surcharge band at 
230-329 points, and so on. These surcharge bands fall in the lower 
end of the range suggested by the results shown in tables 1 and 2.
    The analysis above suggests that the surcharge should depend on 
the logarithm of the LGD score. The logarithmic function could 
justify bands that are smaller for lower LGD scores and larger for 
higher LGD scores. For the following reasons, however, fixed-width 
bands are more appropriate than expanding-width bands.
    First, fixed-width surcharge bands facilitate capital planning 
for less-systemic firms, which would otherwise be subject to a 
larger number of narrower bands. Such small bands could result in 
frequent and in some cases unforeseen changes in those firms' 
surcharges, which could unnecessarily complicate capital planning 
and is contrary to the objective of ensuring that relatively small 
changes in a firm's score generally will not alter the firm's 
surcharge.
    Second, fixed-width surcharge bands are appropriate in light of 
several concerns about the RORWA dataset and the relationship 
between systemic indicators and systemic footprint that are 
particularly relevant to the most systemically important financial 
institutions. Larger surcharge bands for the most systemically 
important firms would allow these firms to expand their systemic 
footprint materially within the band without augmenting their 
capital buffers. That state of affairs would be particularly 
troubling in light of limitations on the data used in the 
statistical analysis above.
    In particular, while the historical RORWA dataset used to derive 
the function relating a firm's LGD score to its surcharge contains 
many observations for relatively small losses, it contains far fewer 
observations of large losses of the magnitude necessary to cause the 
failure of a firm that has a very large systemic footprint and is 
therefore already subject to a surcharge of (for example) 4.0 
percent. This paucity of observations means that our estimation of 
the probability of such losses is substantially more uncertain than 
is the case with smaller losses. This is reflected in the magnitude 
of the standard error range associated with our regression analysis, 
which is large and rapidly expanding for high LGD scores. Given this 
uncertainty, as well as the Board's Dodd-Frank Act mandate to impose 
prudential standards that mitigate risks to financial stability, we 
should impose a higher threshold of certainty on the sufficiency of 
capital requirements for the most systemically important financial 
institutions.
    Two further shortcomings of the RORWA dataset make the case for 
rejecting ever-expanding bands even stronger. First, the frequency 
of extremely large losses would likely have been higher in the 
absence of extraordinary government actions taken to protect 
financial stability, especially during the 2007-08 financial crisis. 
As discussed above, the GSIB surcharge should be set on the 
assumption that extraordinary interventions will not recur in the 
future (in order to ensure that they will not be necessary in the 
future), which means that firms need to hold more capital to absorb 
losses in the tail of the distribution than the historical data 
would suggest. Second, the historical data are subject to 
survivorship bias, in that a given BHC is only included in the 
sample until it fails (or is acquired). If a firm fails in a given 
quarter, then its experience in that quarter is not included in the 
dataset, and any losses realized during

[[Page 49116]]

that quarter (including losses realized only upon failure) are 
therefore left out of the dataset, leading to an underestimate of 
the probability of such large losses.
    Additionally, as discussed above, our assumption of a linear 
relationship between a firm's LGD score and the risk that its 
failure would pose to financial stability likely understates the 
surcharge that would be appropriate for the most systemically 
important firms. As noted above, there is reason to believe that the 
damage to the economy increases more rapidly as a firm grows in 
size, complexity, reliance on short-term wholesale funding, and 
perhaps other GSIB metrics.
    Finally, fixed-width bands are preferable to expanding-width 
bands because they are simpler and therefore more transparent to 
regulated entities and to the public.

Alternatives to the Expected Impact Framework

    Federal Reserve staff considered various alternatives to the 
expected impact framework for calibrating a GSIB surcharge. All 
available methodologies are highly sensitive to a range of 
assumptions.

Economy-Wide Cost-Benefit Analysis

    One alternative to the expected impact framework is to assess 
all social costs and benefits of capital surcharges for GSIBs and 
then set each firm's requirement at the point where marginal social 
costs equal marginal social benefits. The principal social benefit 
of a GSIB surcharge is a reduction in the likelihood and severity of 
financial crises and crisis-induced recessions. Assuming that 
capital is a relatively expensive source of funding, the potential 
costs of higher GSIB capital requirements come from reduced credit 
intermediation by GSIBs (though this would be offset to some extent 
by increased intermediation by smaller banking organizations and 
other entities), a potential loss of any GSIB scale efficiencies, 
and a potential shift of credit intermediation to the less-regulated 
shadow banking sector. The GSIB surcharges that would result from 
this analysis would be sensitive to assumptions about each of these 
factors.
    One study produced by the Basel Committee on Banking Supervision 
(with contributions from Federal Reserve staff) finds that net 
social benefits would be maximized if generally applicable common 
equity requirements were set to 13 percent of risk-weighted assets, 
which could imply that a GSIB surcharge of up to 6 percent would be 
socially beneficial.\79\ The surcharges produced by the expected 
impact framework are generally consistent with that range.
---------------------------------------------------------------------------

    \79\ See Basel Committee on Banking Supervision (2010), An 
Assessment of the Long-Term Economic Impact of Stronger Capital and 
Liquidity Requirements (Basel, Switzerland: Bank for International 
Settlements, August), p. 29, www.bis.org/publ/bcbs173.pdf. The study 
finds that a capital ratio of 13 percent maximizes net benefits on 
the assumption that a financial crisis can be expected to have 
moderate permanent effects on the economy.
---------------------------------------------------------------------------

    That said, cost-benefit analysis was not chosen as the primary 
calibration framework for the GSIB surcharge for two reasons. First, 
it is not directly related to the mandate provided by the Dodd-Frank 
Act, which instructs the Board to mitigate risks to the financial 
stability of the United States. Second, using cost-benefit analysis 
to directly calibrate firm-specific surcharges would require more 
precision in estimating the factors discussed above in the context 
of surcharges for individual firms than is now attainable.

Offsetting the Too-Big-To-Fail Subsidy

    It is generally agreed that GSIBs enjoyed a ``too-big-to-fail'' 
funding advantage prior to the crisis and ensuing regulation, and 
some studies find that such a funding advantage persists. Any such 
advantage derives from the belief of some creditors that the 
government might act to prevent a GSIB from defaulting on its debts. 
This belief leads creditors to assign a lower credit risk to GSIBs 
than would be appropriate in the absence of this government 
``subsidy,'' with the result that GSIBs can borrow at lower rates. 
This creates an incentive for GSIBs to take on even more leverage 
and make themselves even more systemic (in order to increase the 
value of the subsidy), and it gives GSIBs an unfair advantage over 
less systemic competitors.
    In theory, a GSIB surcharge could be calibrated to offset the 
too-big-to-fail subsidy and thereby cancel out these undesirable 
effects. The surcharge could do so in two ways. First, as with an 
insurance policy, the value of a potential government intervention 
is proportional to the probability that the intervention will 
actually occur. A larger buffer of capital lowers a GSIB's 
probability of default and thereby makes potential government 
intervention less likely. Put differently, a too-big-to-fail subsidy 
leads creditors to lower the credit risk premium they charge to 
GSIBs; by lowering credit risk, increased capital levels would lower 
the value of any discount in the credit risk premium. Second, 
banking organizations view capital as a relatively costly source of 
funding. If it is, then a firm with elevated capital requirements 
also has a concomitantly higher cost of funding than a firm with 
just the generally applicable capital requirements. And this 
increased cost of funding could, if calibrated correctly, offset any 
cost-of-funding advantage derived from the too-big-to-fail subsidy.
    A surcharge calibration intended to offset any too-big-to-fail 
subsidy would be highly sensitive to assumptions about the size of 
the subsidy and about the respective costs of equity and debt as 
funding sources at various capital levels. These quantities cannot 
currently be estimated with sufficient precision to arrive at 
capital surcharges for individual firms. Thus, the expected impact 
approach is preferable as a primary framework for setting GSIB 
surcharges.

    By order of the Board of Governors of the Federal Reserve 
System, July 27, 2015.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2015-18702 Filed 8-13-15; 8:45 am]
BILLING CODE 6210-01-P