Beyond Basel: Fed Asks for Higher Capital Surcharge

Big banks would have to put aside as much as 4.5% of their total risk-weighted assets, compared with Basel III's maximum of 2.5%.
Matthew HellerDecember 10, 2014

As part of its effort to avoid “too big to fail” scenarios, the U.S. Federal Reserve has proposed levying risk-based capital surcharges on the eight largest U.S. banks, surcharges that go beyond the requirements of Basel III.

Under the Fed’s proposal, a firm identified as a global systemically important bank would be subject to a surcharge ranging from 1.0% to 4.5% of its total risk-weighted assets. The maximum surcharge set under the global Basel III rules is 2.5%.

According to Fortune, JPMorgan Chase likely will bear the brunt of the new rule. The bank had about $163 billion in top-quality capital, or 10.1% of risk-weighted assets, as of the end of the third quarter, meeting the Basel III standard. But in order to meet the new 11.5% ratio indicated by the Fed for the highest-risk group, it would need more than $20 billion in additional capital.

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The Fed’s more stringent requirements “should provide substantial net economic benefits by reducing the risks of destabilizing failures of very large banking organizations,” Fed Governer Daniel K. Tarullo said in a statement.

The central bank anticipates using one of two methods to calculate an individual bank’s surcharge. One method will consider the bank’s “size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity, consistent with a methodology developed by [Basel III].”

The other method, the Fed said, would replace substitutability with use of short-term wholesale funding and “would generally result in significantly higher surcharges.” The calculation would be based on the higher of the two surcharges.

“Inclusion of a short-term wholesale funding factor reflects the fact that reliance on short-term wholesale funding can leave a firm vulnerable to creditor runs that force the firm to rapidly liquidate its own positions or call in short-term loans to clients,” Tarullo explained.

Such a methodology could hurt Goldman Sachs and Morgan Stanley most. Short-term wholesale funding accounts for about 35% of their liabilities, compared with about 20% percent for the other six banks, Treasury & Risk reports, citing data compiled by Keefe Bruyette & Woods.