When the FRB approved the G-SIB surcharge proposal, we noted the emphatic approach the Board took to demanding a high surcharge on grounds that the largest U.S. banking organizations must bear the cost on their own not only of insolvency, but also liquidity risk.  Our in-depth analysis of the proposal confirms this reading – indeed, the details on the NPR are surprising in terms of the strong statements in the preamble about the need for the largest U.S. banks to plan for their own resilience under liquidity strain, not take comfort in resorting to the central bank.  This reinforces the blow big banks received over the summer, when the FRB joined the FDIC in rejecting most large-bank living wills in part because they assumed discount-window or emergency-liquidity facility access. 

It remains to be seen if Congressional critics are satisfied with the Board’s tough new stand on liquidity backstops – we doubt it – but it is already clear that G-SIB asset/liability management will need to be structurally realigned to avoid not only living-will rejection in 2016, but also punitive capital surcharges.

Another key policy take-away from the surcharge proposal is its tough tone on TBTF.  Moving beyond the FRB’s longstanding public posture – TBTF is on its way to a meaningful end in the U.S. – the NPR justifies the surcharge in part on the need to price for the “perception” that the largest BHCs remain too big to fail.  Nothing in the proposal suggests that final build-out of the orderly-liquidation process would lead to a rethink and, thus, to any reduced surcharge.  Indeed, much in the proposal confirms our take on the Board meeting:  the surcharge may well be added to the CCAR minimums, as well as imposed on non-bank SIFIs and foreign banks designated in their home countries as G-SIBs.

Finally, our analysis notes the NPR’s impact on BHCs with assets above $50 billion.  The proposal would require even the smallest BHCs above this threshold to calculate their systemic score under both methods in the proposal, although the chances that a surcharge would in fact be applied is small based on the proposed methodology.  The risk, though, of the surcharge is such that we expect most BHCs to review funding and counterparty exposures to minimize their chances of designation, adding additional constraints above and beyond those in the liquidity rules and pending single-counterparty credit limits.

If you would like to see FedFin’s analysis of the G-SIB surcharge proposal, discuss comments on it, or have any questions, please e-mail to info@fedfin.com or call us at 202.589.0880.  We would be pleased to have the appropriate FedFin staffers working on this matter address any concerns you may have.