Bank Capital Requirements: Basel Committee Updates Framework for Assessing a Common Equity Surcharge on Global Systemically Important Banks

Sullivan & Cromwell LLP - July 26, 2013

The Basel Committee on Banking Supervision (the “BCBS”) recently issued a revised framework (the “Revised G-SIB Framework”) for assessing a common equity surcharge on certain designated global systemically important banks (“G-SIBs”) that updates and replaces the framework for assessing the G-SIB capital surcharge issued by the BCBS in November 2011 (the “Prior G-SIB Framework”). The Revised G-SIB Framework largely maintains the Prior G-SIB Framework’s indicator-based approach for determining when a capital surcharge will be applied and does not change the calibration of the surcharge. However, the Revised G-SIB Framework makes several noteworthy changes to, and clarifies important aspects of, the Prior G-SIB Framework, including:

  • Methodology for Determining Sample Banks. The Revised G-SIB Framework establishes formal criteria for determining the sample of banks used to determine a bank’s indicator-based systemic importance score (“systemic importance score”). The sample of banks used to determine the denominator for purposes of calculating each bank’s systemic importance score will consist of (i) the 75 “largest” global banks as determined by the Basel III leverage ratio exposure measure (the “Exposure Measure”), (ii) banks designated as G-SIBs in the previous year and (iii) other banks added using supervisory judgment (collectively, the “Bank Sample”).
  • Removal of Wholesale Funding Ratio Indicator. The Revised G-SIB Framework replaces the wholesale funding ratio indicator with a “securities outstanding” indicator. Under the Prior G-SIB Framework, the wholesale funding ratio generally measured the portion of a bank’s liabilities that were not funded by retail funding. The new “securities outstanding” indicator aims to measure the amount of debt securities, commercial paper and certificates of deposits a bank has outstanding, as well as the book value of its equity and its equity market capitalization.
  • Cap on the Substitutability Category. The Revised G-SIB Framework will cap the maximum potential impact of the substitutability/financial institution infrastructure category because the BCBS has found that it was having a greater than intended impact on the assessment of systemic importance for banks that are “dominant” in the provision of payment, underwriting and asset custody services. The terms of the cap will not be disclosed until the cutoff score and bucket thresholds are disclosed in November 2013.
  • Disclosure Requirements for Certain Large Banks. Under the Revised G-SIB Framework, banks having an Exposure Measure exceeding €200 billion (or an equivalent amount), as well as banks designated as G-SIBs in the previous year, will need to disclose publicly their scores for the 12 indicators used to determine banks’ systemic importance scores. The Revised G-SIB Framework contemplates that national supervisors would implement these disclosure requirements by January 2014. The Prior G-SIB Framework did not have similar disclosure requirements.
  • Updates to Denominators and Timing. The Prior G-SIB Framework would have updated the denominators every three years. The Revised G-SIB Framework will update the denominator on an annual basis. According to the BCBS, this change was made to reduce potentially large changes in systemic importance scores simply as a result of an update to the denominator and to neutralize the impact of exchange rate movements.
  • Timing of Cutoff Scores and Bucket Thresholds. Under the Revised G-SIB Framework, the BCBS will publish the cutoff score and bucket thresholds in November 2013 based on year-end 2012 Bank Sample financial data, one year earlier than under the Prior G-SIB Framework. The BCBS will also disclose the denominators in November 2013 based on year-end 2012 data. As a result, there will be a revised draft list of G-SIBs published in November 2013. The updated list of G-SIBs that will be subject to a G-SIB surcharge starting on January 1, 2016 (and updated denominators used to determine such surcharge) will be published in November 2014.
  • Consequences of Empty Bucket Becoming Populated. The Prior G-SIB Framework provided for an initially empty top bucket requiring a 3.5% surcharge. If that bucket became populated, the Prior G-SIB Framework provided that a new empty bucket would be added with a higher surcharge requirement but did not specify the surcharge requirement. The Final G-SIB Framework retains this general structure but clarifies that any additional empty buckets that are added would receive an additional capital surcharge of 1% over the previous highest bucket.

As under the Prior G-SIB Framework, the surcharge requirement under the Revised G-SIB Framework will be phased-in in parallel with the Basel III capital conservation and countercyclical buffers, beginning on January 1, 2016 and becoming fully effective on January 1, 2019.