The Board of Governors of the Federal Reserve System (“FRB”) proposed a framework to establish risk-based capital surcharges for the largest, most interconnected U.S.-based bank holding companies.
Specifically, the proposed framework would require a U.S. bank holding company with $50 billion or more in total consolidated assets to calculate a measure of its systemic importance to determine whether it is a global systemically important banking organization (“GSIB”). A firm identified as a GSIB would be subject to a risk-based capital surcharge, calibrated based on its systemic risk profile, that would increase its capital conservation buffer under the FRB’s regulatory capital rule. The proposal also would revise the terminology used to identify the firms subject to the enhanced supplementary leverage ratio standards to ensure the consistency of the scopes of application of both rulemakings.
The proposed framework would be phased in beginning on January 1, 2016, and become fully effective on January 1, 2019.
Comments on the proposed rule are due by February 28, 2015.
Yesterday, we posted an opinion piece arguing that the CFTC rules made it uneconomical for “smaller” banks (such as State Street, the 13th largest bank holding company in the United States with over $280 billion in assets) to effectively compete in businesses such as clearing swaps given the high regulatory and other fixed costs. The result is that only the very, very largest banking organizations have the scale to offer derivatives clearing services in products such as rates and currency, which are fairly important to the operation of the U.S. and global economy. Today, the news is that those very, very large banks are going to be hit with materially higher capital charges. In short, under our current regulatory policy, it stinks to be small and it stinks to be big.
While one can argue that there is some overall policy of risk reduction here, it is not obvious that punishing both the big and the small is a consistent policy, given that it does not incentivize any conduct (other than inactivity). Further, the goal of risk reduction in the financial sector (if that is the goal) creates material costs (i) in the “Main Street” sector, by reduced economic activity, (ii) in the United States by chasing credit business out of the United States and (iii) to the regulated sector by driving business out of regulated credit institutions.
At some point, “more regulation” stops being a wise regulatory policy. At a minimum, the regulators should make clear what are their goals. If their goals are a financial system with greater diversity of participation, then it follows that they should reduce the fixed costs of regulation to give small players opportunities. If their goals are to keep small players out of certain business, then it follows that they should not impose surcharges on the big players, which surcharges will be felt by the “Main Street” economy.
