Last night, we provided the details of the FRB’s G-SIB surcharge. Here, we follow up with a forward-looking assessment of what it means for FRB action on the host of pending rules and Congressional TBTF work in 2015.

The pressure on the FRB is evident in comments on the rule last night from Sen. Vitter (R-LA), who said that “even the pro-megabank Federal Reserve” now sees the benefits of shrinking the biggest U.S. banks. He and Sen. Brown (D-OH) applauded the proposal, but made it clear that it in no way ended their efforts to legislate higher leverage surcharges for the biggest U.S. banks (see FSM Report TBTF8). As we have previously noted, Sen. Shelby (R-AL) supports this and we expect a major push on big-bank capital and related matters in the new Congress.

However, the FRB did not impose tough surcharges solely because it knows the pressure it faces next year over its role as what some have called a “captive” big-bank regulator. What struck us yesterday was the forceful tone Chair Yellen adopted about the need for big banks to “internalize the negative externalities” of fire-sale risk. Both she and Vice Chair Fisher also questioned whether the proposed surcharges were high enough to create these desired internalization incentives, leading us to conclude that the Board will at the least load the surcharges into the 2015 CCAR exercises for covered G-SIBs.

In the near term, we do not expect this also for the IHCs of foreign banks whose parents are G-SIBs, but this will come into force over time as the FRB builds out the parallel track for FBOs.

Finally, the tough proposal and the still tougher tone at the Board meeting is in our view an important alert to the likely outcome of other pending FRB matters. In its proposal for regulating GE Capital (see FSM Report SIFI), the FRB says it will consider the G-SIB surcharge for non-banks – consider that done. The Board is also finalizing single-counterparty credit limits and getting ready to propose the U.S. version of the net stable funding ratio and TLAC. Gov. Tarullo has already said that the NSFR and TLAC will be tougher than Basel, and the credit-exposure limits are likely to take the same tough tack. The most immediate priority for the FRB is, however, to propose universal-margin rules mentioned yesterday by Ms. Yellen. These will not await FSB deliberations on how to treat non-banks, although the FRB’s legal authority to go as far as desired remains uncertain.

If you have any questions, please send an e-mail to and the FedFin staffer analyzing these issues will promptly respond.