[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
-----------------------------------------------------------------------
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]]
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\4\ 79 FR 75473 (December 18, 2014).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\7\ Summaries of these meetings are available on the Board's
public Web site.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\8\ 12 CFR part 243.
\9\ 12 CFR 225.8.
\10\ 12 CFR part 252.
\11\ 12 CFR part 252.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\12\ See 12 U.S.C. 5365(b)(3).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\17\ See paragraph 39 of the Revised BCBS Document.
\18\ See paragraph 62 of the Revised BCBS Document.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\21\ See Public Law, 128 Stat. 3017 (2014).
---------------------------------------------------------------------------
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
------------------------------------------------------------------------
Indicator
Category Systemic indicator weight (%)
------------------------------------------------------------------------
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:.
------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\24\ See paragraph 18 of the Revised BCBS Document.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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