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
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