On Monday, March 2, the Systemic Risk Council submitted a letter to the Board of Governors of the Federal Reserve System, supporting the Board’s recent proposal of a risk-based capital surcharge for U.S. bank holding companies identified as global systemically important banking organizations (G-SIBs) and calling for the proposal to be strengthened in several key areas.
The letter in part states:
“The Council believes that a well-calibrated GSIB surcharge will assist regulators and GSIBs to lean into the headwinds of systemic risk ex ante, that is, prior to the onset of periods of financial stress. This, in turn, will contribute to a reduction of the probability of catastrophic GSIB failures. . . . [T]he Council would encourage the Board to give even greater weight to a GSIB’s ‘complexity’ in calculating the surcharge. Furthermore, by explicitly incorporating into the measurement of systemic risk the additional factor of a GSIB’s reliance on short-term wholesale funding—a factor not included in the surcharge framework suggested by the Basel Committee on Banking Supervision—the Proposed Rule promises to curtail one of the key accelerants of the contagion that engulfed the global financial system during the 2008 financial crisis. . . . Finally, by encouraging GSIBs to curtail or eliminate factors and activities contributing to their GSIB status, the GSIB surcharge is likely to reduce the moral hazard arising from the perception that GSIBs are ‘too big to fail.’”
Read the full letter below: