Bank Capital Requirements: Regulatory Capital Surcharge for Global Systemically Important Banks

Sullivan & Cromwell LLP - July 26, 2011

On July 19, 2011, the Basel Committee on Banking Supervision (the “BCBS”) issued a consultative document setting forth a requirement for a new common equity capital surcharge on certain global systemically important banks (“G-SIBs”). A summary of the surcharge proposal was announced on June 25, 2010 in a short press release by the Group of Governors and Heads of Supervision of the BCBS. The July 29 consultative document now describes the proposal in significantly more detail. The main elements of the surcharge proposal are as follows:

  • G-SIBs would be subject to an additional progressive Common Equity Tier 1 (“CET1”) surcharge, referred to in the consultative document as a “loss absorbency requirement” ranging from 1% to 3.5% over the Basel III 7% CET1 requirement.
  • The exact amount of the surcharge depends on a bank’s placement in one of five “buckets” (requiring a 1%, 1.5%, 2%, 2.5% and 3.5% surcharge, respectively) based on the bank’s global systemic importance under the proposal’s methodology.
  • To determine the level of the surcharge – that is which G-SIB bucket, if any, a bank is placed into – the proposal relies predominantly on a quantitative “indicator-based approach” comprised of five broad categories: cross-jurisdictional activity; size; interconnectedness; substitutability; and complexity.
  • The results of the indicator-based approach may be adjusted, to a limited extent and in rare circumstances, to reflect supervisory judgment.
  • The surcharge requirement will be phased in with the Basel III capital conservation and countercyclical buffers, beginning in January 1, 2016 and becoming fully effective on January 1, 2019.
  • The proposal contemplates that the top bucket requiring the highest 3.5% surcharge will initially be empty in order to provide a disincentive for G-SIBs to increase materially their global systemic importance in the future.
  • Under the proposal, final decisions concerning the applicability and implementation of the surcharge in general and with respect to particular institutions are no longer to be left to national supervisory authorities but are to be made jointly at an international level by the Financial Stability Board and national authorities, in consultation with the BCBS.

The press release accompanying the consultative document requests that any comments on the surcharge proposal be submitted by August 26, 2011.