On March 30, 2017, the Basel Committee on Banking Supervision (“BCBS”) issued a consultative document to revise the methodology it uses to measure the systemic importance of internationally active banks.  The BCBS methodology incorporates various quantitative indicators of a bank’s “Cross-Jurisdictional Activity,” “Size,” “Interconnectedness,” “Substitutability,” and “Complexity” to arrive at a single score of each internationally active bank’s systemic importance.  The Financial Stability Board uses the BCBS methodology to identify global systemically important banks (“G-SIBs”) and categorize G-SIBs into different capital “buckets” by which national supervisors are to impose escalating capital surcharges.

Of particular note, the BCBS proposal seeks comment on whether the G-SIB assessment methodology should incorporate a measure of a bank’s reliance on short-term wholesale funding (“STWF”).  In the United States, the Federal Reserve has already incorporated a STWF factor into its G-SIB surcharge rule by introducing a “method 2” for calculating each U.S. G-SIB’s score and capital bucket.  (The Federal Reserve’s “method 1” is based on the BCBS standard.)  The scores of U.S. G-SIBs are generally significantly higher under the Federal Reserve’s method 2 than under its method 1 and the BCBS methodology.

Some in the industry have criticized the Federal Reserve’s G-SIB surcharge methodology for “gold-plating” the international standard by incorporating a STWF factor and calibrating its capital buckets too high, thereby imposing more stringent capital surcharges than are required under the existing BCBS methodology.  The BCBS could dampen some of this criticism by incorporating STWF into its methodology.  However, the BCBS proposal would only include STWF as one subcomponent of the Interconnectedness factor.  This approach would give STWF much less weight in the BCBS methodology than under the Federal Reserve’s method 2, which replaces the entire Substitutability factor with a STWF factor.  Accordingly, the BCBS proposal expressly notes that incorporating the STWF indicator would only result in two banks receiving higher capital surcharges, and those banks would each only move up one capital bucket.  In contrast, the Federal Reserve’s method 2 results in most U.S. G-SIBs moving up two or more capital buckets compared to its method 1.

The BCBS proposal also would:

  • remove the existing 500 basis point cap on the Substitutability factor;
  • capture the activities of a bank’s insurance subsidiaries in indicators that are components of the Size, Interconnectedness, and Complexity factors;
  • include derivative liabilities in cross-jurisdictional liabilities, which is one component of the Cross-Jurisdictional Activity factor; and
  • add a new indicator of trading volume, which would comprise 3.33 percent of the total G-SIB score as part of the Substitutability factor, and reduce the weight of the existing indicator for underwriting volume from 6.67 percent to 3.33 percent.

The BCBS is accepting comments on its proposal through June 30, 2017, and will make a final decision on incorporating the STWF factor in September 2017.