Senate Democrats back Fed's reform proposal for GSIB surcharge

Bloomberg News

Four Democrats on the Senate Banking Committee have endorsed the Federal Reserve proposed changes to a capital requirement imposed upon the nation's largest banks.

Sens. Sherrod Brown, D-Ohio, Elizabeth Warren, D-Mass., Jack Reed, D-R.I., and John Fetterman, D-Pa., sent a letter to Federal Reserve Vice Chair for Supervision Michael Barr on Thursday expressing their support for potential changes to the Global Systemically Important Bank, or GSIB, surcharge. 

Put forth in July alongside a broader set of capital reforms known as the Basel III endgame, the GSIB surcharge proposal would change the reporting standards that feed into capital requirements for the eight largest U.S.-based banks — Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo.

The change in the reporting standard is meant to smooth out the sometimes drastic shifts from tier to tier within the GSIB capital framework, avoiding the so-called "cliff effect." As proposed, no U.S. firm would see their capital requirements altered. 

Still, the senators called the move an important step to better safeguarding the financial system.

"The proposal would enhance the sensitivity and responsiveness of the surcharge to changes in an institution's risk profile and deter firms from gaming the system to lower their capital buffers," they wrote. "These banks should be using more shareholders' equity to fund their risky activities, so that they — not U.S. taxpayers — are on the hook if those bets do not pay off."

The letter from Brown, the chair of the Banking Committee, along with Warren, Reed and Fetterman represents some of the most direct and clear congressional support for the capital reform efforts currently being pursued by bank regulators in Washington. 

Republicans have broadly opposed the various proposals from the Fed, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, and some more moderate Democrats have also been skeptical of the reforms. Regulators do not need congressional approval for their changes, but the reforms are increasingly being debated in the court of public opinion.

Thursday was the original cut-off for comments on the GSIB surcharge proposal as well as the Basel III endgame proposal and a proposal to expand long-term debt requirements to all banks with at least $100 billion of assets. But, after calls from industry groups and concerns expressed by Fed and FDIC officials, the deadline to comment on the rules was pushed off to January. 

Regulation and compliance

Senate moderates voice concerns with Basel endgame

November 14, 2023 3:36 PM

Thursday was the final day to comment on potential revisions to the guidance around resolution plans, which would amend the expectations around banks that have more than $250 billion of assets but fall short of GSIB designation. 

That proposal elicited concern from banking groups that were concerned about how these new guidelines might overlap with other proposed changes. This was particularly concerning for some international banks, some of which could be bumped into a higher tier of regulation because of a potential reporting change that would require them to count cross-border derivatives among their international exposures. 

The Institute for International Bankers, a trade group for foreign banks with U.S. operations, wrote in its letter that it would not be fair for banks well below the size of and complexity of the GSIBs to be subjected to similar regulatory requirements. It called for a "holistic" review of how the various reforms would interact with one another to prevent such an outcome.

"The U.S. operations of international banks are a fraction of the size of U.S. GSIBs, and guidance and expectations applicable to these U.S. operations should be much different from and much more flexible than guidance applicable to the U.S. GSIBs," the group wrote.