Financial Stability Board, Basel Committee Propose Systemic Capital Buffer
Blayne V. Scofield | Bloomberg Law
On November 4, 2011 the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (Basel Committee) announced initiatives to control and mitigate systemic risk presented by global systemically important banks (G-SIBs). One of the measures approved by FSB and the Basel Committee was a new capital requirement for G-SIBs that will apply in addition to the other capital requirements that G-SIBs must comply with.
Determination of G-SIBs
The methodology used by the FSB and the Basel Committee to designate G-SIBs is set forth in the Basel Committee’s rules text. Unlike its U.S. counterpart, the G-SIB determination approach outlined by FSB and the Basel Committee is transparent and quantitative. The FSB/Basel Committee system uses five categories, each of which contains one or more indicators. The indicators are quantified using metrics defined in the Basel Committee rules text. The categories and indicators are set forth in the table below.
|Total exposures (as defined in the Basel III leverage ratio)||Intra-financial system assets
Intra-financial system liabilities
Wholesale funding ratio
Payments cleared and settled
|Notional value of OTC derivatives
Level 3 assets
Securities held for trading and available for sale
Each bank evaluated under this system receives a numerical score. The rules text indicated that 73 banks were put through the determination process and that, for the time being, G-SIBs will include the top-scoring 27 banks (as well as two other banks included by their home supervisors using their supervisory judgment). The FSB and Basel Committee indicated that they will re-run the process each November and update the list of G-SIBs as appropriate.
The initial G-SIBs are Bank of America, Bank of China, Bank of New York Mellon, Banque Populaire CdE, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, Deutsche Bank, Dexia, Goldman Sachs, Group Crédit Agricole, HSBC, ING Bank, JP Morgan Chase, Lloyds Banking Group, Mitsubishi UFJ FG, Mizuho FG, Morgan Stanley, Nordea, Royal Bank of Scotland, Santander, Société Générale, State Street, Sumitomo Mitsui FG, UBS, Unicredit Group, and Wells Fargo.
G-SIB Capital Buffer
Federal Reserve Governor Daniel Tarullo made the case for a systemic risk capital buffer in a June 3, 2011 speech. In short, he argued that a buffer was necessary to compensate for the negative externalities that G-SIBs impose on the financial system due to their size and the fact that G-SIBs receive liquidity at artificially low prices due to the perception that they are too big to fail. For more information, see Blayne V. Scofield, Tarullo Discusses Macroprudential Capital Requirements for SIFIs, Bloomberg Law Reports®—Banking and Finance (June 9, 2011).
Under the FSB and Basel Committee framework, G-SIBs will be assigned to one of five risk buckets, which will correspond to capital buffer levels—1.0, 1.5, 2.0, 2.5, or 3.5 percent of risk weighted assets. The 3.5 percent bucket will initially be empty. The G-SIBs will be distributed roughly equally across the four other buckets. FSB and the Basel Committee indicated that the purpose of the top bucket is to create a disincentive from other banks becoming systemically important. If additional banks are identified as G-SIBs and the top bucket becomes populated, the FSB and the Basel Committee indicated that a new empty bucket with a higher capital buffer will be created. G-SIBs must meet the capital requirements with common stock, surplus, and retained earnings.
Implementation and Effective Dates
Importantly, the FSB’s and Basel Committee’s measures are not self-executing and must be implemented by their member governments in order to take effect. In the U.S., federal banking regulators have not announced a timeframe for implementing the G-SIB capital buffer.
The FSB and Basel Committee indicated that the capital buffer requirements will apply to those banks that are identified as G-SIBs in November 2014. The capital buffers will be phased-in beginning in January 2016 and full compliance will be mandatory in January 2019.
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