The Federal Reserve today laid out the capital and liquidity surcharges it plans for the largest U.S. banks, departing as anticipated from the Basel framework by hiking the charges and including in them a component judging exposure to short-term funding risk. As a result, the U.S. G-SIB charges are significantly higher than those scored under the Basel framework (see FSM Report CAPITAL180), although all but one designated U.S. G-SIB already holds enough risk-based capital now to meet the new surcharge. The G-SIB surcharge would not necessarily ride above the capital G-SIBs must hold to pass CCAR, although this is an open question and, judging from Board comments, an area where the standards could be considerably strengthened. Perhaps the most striking aspect of the discussion was the strong tone Chair Yellen took, reiterating at several points her desire that G-SIBs absorb the fire-sale risk they pose instead of externalizing it (presumably to the FRB which would then be forced to provide liquidity support). Several governors also suggested the surcharge might not be tough enough since so many G-SIBs already meet it. Reflecting arguments G-SIBs raised as the FRB developed this proposal, Gov. Powell asked about the cumulative cost of the funding surcharge in the context of other liquidity rules, including pending margin requirements, but staff assured him that smaller banks will take on any market functions G-SIBs are forced by this rule to shrink. FedFin will shortly provide clients with an in-depth assessment of this NPR, which when adopted will likely apply over time not just to U.S. G-SIBs, but also to SIFIs like GE Capital (see FSM Report SIFI). Comments on the NPR are due by February 28.       

The full report is available to retainer clients. To find out how you can sign up for the service, click here

.