Bank Capital Requirements: Basel Committee Issues Final Rule Regarding Common Equity Surcharge for Global Systemically Important Banks

Sullivan & Cromwell LLP - November 10, 2011

On November 4, 2011, the Basel Committee on Banking Supervision (the “BCBS”) released its final rule for a common equity surcharge on certain designated global systemically important banks (“G-SIBs”). The final rule is set forth in a document entitled Global Systemically Important Banks: Assessment Methodology and Additional Loss Absorbency Requirement (the “Rule Text”, and the rules set forth therein, the “Final Rule”). The Rule Text was accompanied by a cover note (the “Cover Note”) that summarizes differences between the Final Rule and the G-SIB surcharge rule as initially proposed in a July 2011 consultative document (the “Consultative Document”, and the proposal set forth therein, the “Proposal”) and comments on the major themes of the public comments on the Proposal.

The Final Rule, like the Proposal, uses an indicator-based approach for determining when a G-SIB surcharge will be applied and adopted the Proposal’s assessment methodology largely as proposed. The BCBS expressly rejected certain comments submitted on the Proposal (for example, comments calling for a reduction in the surcharge based on the presence of an effective and credible resolution regime) and refined the Final Rule as compared to the Proposal in respect of others (mostly through clarifications of aspects of certain of the individual indicators).

The BCBS also clarified several aspects of the periodic review process of the Final Rule’s methodology, including how often the denominators of the indicators will be updated and the frequency of the periodic reviews of the indicator-based methodology.