FED Examines Whether G-SIBs in US Influence Their Capital Surcharges
FED published a note that examines whether and how U.S. global systemically important banks, or G-SIBs, adjust the systemic importance indicators to lower their capital surcharges. Evidence shows that the U.S. G-SIBs mainly reduce one indicator of systemic importance—the notional amount of over-the-counter (OTC) derivatives. G-SIBs lower these amounts in the fourth quarter of each year, the quarter that FED uses to determine G-SIB surcharges.
Overall, the assessment studied estimates of changes in 13 systemic importance indicators of G-SIBs in the fourth quarter. The estimate of this effect was only statistically significant for the notional amount of OTC derivatives and implies that OTC derivatives held by G-SIBs drop 13.4% relative to non-G-SIBs at year-end, representing a large effect. The note highlights that this seasonal adjustment is stronger at G-SIBs than at other banks and that it became more pronounced after the G-SIB surcharge was introduced. These findings are consistent with the reports that U.S. bank managers have lowered surcharges to a large extent by compressing OTC derivatives—terminating offsetting contracts and replacing them with another contract with the same market risk but a lower notional amount than the terminated contracts.
The assessment used bank-level data, with the systemic importance indicators coming from the FR Y-15 report and the quarterly data on bank characteristics collected from the FR Y-9C report. Interest rate OTC derivatives are by far the largest category of OTC derivatives at U.S. banks. In the U.S., the G-SIB surcharge was introduced on January 01, 2016, was fully phased in on January 01, 2019, and is applied to the capital conservation buffer of the bank holding company. G-SIB surcharges incentivize banks to lower their indicators, which may decrease the risks that G-SIBs impose on financial stability, but may also adversely affect the economy, for example, if banks restrict the supply of certain services to reduce these indicators.
Related Link: Note
Keywords: Americas, US, Banking, Capital Surcharge, G-SIBs, OTC Derivatives, Systemic Risk, Regulatory Capital, FED
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
ECB Updates Q&A on AnaCredit Regulation in January 2020Related Articles
EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
EP Reaches Agreement on Corporate Sustainability Reporting Directive
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
PRA Consults on Model Risk Management Principles for Banks
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
EC Regulation Amends Standards for Calculating Credit Risk Adjustments
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
HKMA Announces Launch of Data Repository on Sustainable Finance
The Hong Kong Monetary Authority (HKMA) announced that the Green and Sustainable Finance (GSF) Cross-Agency Steering Group has launched the information and data repositories and outlined the progress made in advancing the development of green and sustainable finance in Hong Kong.
BIS Hub Updates Work Program for 2022, Announces New Projects
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
NGFS Report on Integration of G-Cubed Model into NGFS Scenarios
The Network for Greening the Financial System (NGFS) published a report that explores the feasibility of integrating the G-Cubed general equilibrium model into the NGFS suite of models.
US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
EIOPA Consults on Review of Securitization Framework in Solvency II
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.