SIFMA, Clearing House Association and FSR Submit Comments to FRB on GSIB Surcharge (with Lofchie Comment)

SIFMA, the Clearing House Association LLC, and the Financial Services Roundtable ("FSR") (collectively, the "Associations") submitted comments on a proposed rulemaking (the "Proposal") by the Board of Governors of the Federal Reserve System (the "FRB") that would impose additional capital requirements (the "GSIB surcharge") on global systemically important bank holding companies ("GSIBs") headquartered in the United States.

The Associations voiced support for the FRB's determination that a properly structured GSIB surcharge could reduce systemic risk and that, under certain circumstances, reliance on short-term wholesale funding ("STWF") could pose risks to individual institutions as well as the financial system as a whole. Even so, the Associations argued, the Proposal contains significant flaws that include the following:

• The Proposal's methodology does not account for reductions in systemic risk that have been caused by major developments in micro and macro-prudential regulation since 2011, including the Liquidity Coverage Ratio, the Net Stable Funding Ratio and the Enhanced Supplementary Leverage Ratio.

• A lack of transparency vitiates the FRB's explanations of the design, rationale and empirical foundation for certain key elements of the Proposal, such as the doubling of the systemic indicator score and the STWF factor.

• The Proposal affords insufficient consideration of the costs and benefits of the GSIB surcharge on the GSIBs' customers, the markets and the broader economy.

• The Proposal fails to explain why the GSIB surcharge for U.S. GSIBs is significantly higher than it is required to be by international agreement.

In addition to offering the criticisms listed above, the Associations recommended that the FRB implement the Proposal's "method 1" framework for calculating the GSIB surcharge (which reflects international consensus), with slight modifications:

• The Proposal should utilize a rolling five-year average conversion factor to moderate the effects of FX rate volatility on the surcharge calculation;

• The denominator of the surcharge calculation (which reflects the aggregate U.S. market for financial services) should be expanded to include the following non-GSIBs: (i) U.S. banking organizations that already report the information necessary for the systemic indicator calculation; (ii) central counterparties; and (iii) non-bank financial companies designated by the Financial Stability Oversight Council; and

• The STWF factor should be revised to avoid imposing unnecessary costs on certain funding sources that are beneficial to all market participants, namely unsecured wholesale deposits, brokered deposits and secured funding transactions.

Lofchie Comment: The Associations' most profound comment about the FRB's rule proposal is that it is effectively a "black box." The regulators put the name of a big bank into the box and it spits out a number, but the process by which it arrives at the number is not clear. This mysterious process is inconsistent with a regime that is supposed to be based on the "rule of law."

See: Associations' Comment Letter. Related news: FRB Proposes Rules to Increase Capital Positions of Largest U.S. Bank Holding Companies (with Lofchie Comment) (December 9, 2014).