By Piet Schröder
WASHINGTON (Reuters) – The U.S. Federal Reserve is considering a rule change that could save the nation’s eight largest banks combined billions of dollars in capital, in a potential long-sought victory for the industry, according to four people with knowledge of the matter.
The question is how the central bank calculates an additional layer of capital it imposes on US global systemically important banks (GSIBs), known as the ‘GSIB surcharge’, which it introduced in 2015 to increase their safety and soundness.
The Fed is considering updating the inputs it uses in the calculation, which it established in 2015, to adjust for economic growth and in turn more accurately reflect the size of banks relative to the global economy, the people said.
Updating these inputs or “coefficients” would lower the banks’ system scores and resulting capital charges, said the people, who declined to be identified discussing private regulatory issues.
The Fed deliberations, first reported by Reuters, are still ongoing and no decisions have been made, the people said.
But the central bank’s willingness to review the issue is a major advance for the GSIBs’ years-long campaign to cut the surcharge, which had gained little ground until recently. It also shows how a broader battle over capital rules is creating new opportunities for banks to push for other long-sought regulatory concessions.
The potential capital savings for the eight banks, including JPMorgan, Citigroup and Bank of America, would depend on a number of factors, including their business models.
According to Fed data, U.S. GSIBs collectively held about $230 billion in capital as a result of the sequestration in the first quarter of 2024, suggesting that even a small change could lead to significant savings for some banks.
For example, according to a Reuters calculation, a 0.5% surcharge amounts to more than $8 billion for JPMorgan and Bank of America. These are money banks that say they can reenter the economy through loans.
Spokespeople for the GSIBs, which also include Wells Fargo, Goldman Sachs, Morgan Stanley, BNY and State Street (NYSE:), declined to comment or did not immediately respond to requests for comment.
The surcharge, introduced as a result of the 2009 global financial crisis, aims to increase the resilience of GSIBs given the threat they pose to financial stability.
When the Fed adopted the rule, it said it was setting the coefficients, which relate to a bank’s size, interconnectedness, complexity and cross-border activities, based on data from 2012-2013.
The central bank said this approach would improve the predictability of scores and make it easier for banks to plan, but that it would periodically review the framework.
GSIBs say a review is long overdue. Because banks tend to grow in line with the economy, using an outdated methodology makes them appear larger relative to the global economy than they actually are, they have argued.
“U.S. GSIBs maintain more than $59 billion in GSIB capital buffers attributable solely to overall economic growth,” JPMorgan wrote in a public letter to the Fed in January.
The Fed is considering updating the coefficients to take into account global economic growth in recent years, the people said, although Reuters could not determine exactly how it might do that.
BASEL FIGHT
Fed officials have long been reluctant to revisit the coefficients, wary of being seen as a handful of big banks handing out a handful of big banks, the sources and other industry officials said.
But the central bank sparked a debate last year when it, along with two other regulators, unveiled the ‘Basel Endgame’ proposal, which would increase capital raising for GSIBs and other major banks. Fed officials have argued that the plan would more accurately assess the risk of bank losses.
At the same time, the Fed proposed making the GSIB surcharge more sensitive to banks’ risks, a change it can make itself.
It did not elaborate on the coefficients and expected the changes to have a small impact on the size of banks’ capital surcharges, although some banks say they will increase them. But the proposals sparked a huge lobbying effort from the industry, opening the door for GSIBs to put pressure on the coefficients again.
Big banks will be hardest hit by the Basel proposal and have argued aggressively that it will force them to curb lending.
The Fed is sympathetic to these complaints and is working to revise the proposal, but any concessions would have to be approved by the other regulators, which are less receptive, Reuters reported.
Updating the surcharge coefficients is one way the Fed can on its own offset the impact of the Basel hikes on big banks, some industry officials have argued in private meetings with the Fed.
The Federal Reserve could ease the burden on the largest banks if a moderate deal is not reached [Basel] by simultaneously offering reforms to GSIB allowances. That could offset any capital increase at the largest banks of between 3% and 5%,” Jaret Seiberg, an analyst at TD Cowen, wrote in a note on Tuesday in response to the Reuters report.
However, a fifth person familiar with the matter said the two projects are unrelated and that Fed officials are moving forward on them independently.
If the Fed were to change the coefficients, it would likely choose to re-propose the rule for additional public feedback, the sources said, which could delay a final decision by several months.
