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
Previous ArticleECB Updates Q&A on AnaCredit Regulation in January 2020
The Prudential Regulation Authority (PRA) published the final policy statement PS21/21 on the leverage ratio framework in the UK. PS21/21, which sets out the final policy of both the Financial Policy Committee (FPC) and PRA
The Consumer Financial Protection Bureau (CFPB) proposed to amend Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) under Section 1071 of the Dodd-Frank Act.
The Prudential Regulation Authority (PRA) decided to maintain, at the 2019 levels, the buffer rates for the Other Systemically Important Institutions (O-SII) for another year, with no new rates to be set until December 2023.
The Financial Stability Board (FSB) published a progress report on implementation of its high-level recommendations for the regulation, supervision, and oversight of global stablecoin arrangements.
In a letter to the authorized deposit taking institutions, the Australian Prudential Regulation Authority (APRA) announced an increase in the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) are consulting on the preliminary guidance that clarifies that stablecoin arrangements should observe international standards for payment, clearing, and settlement systems.
The European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) have set out their respective work priorities for 2022.
The Malta Financial Services Authority (MFSA) updated the guidelines on supervisory reporting requirements under the reporting framework 3.0, in addition to the reporting module on leverage under the common reporting (COREP) framework.
The European Commission (EC) published the Implementing Decision 2021/1753 on the equivalence of supervisory and regulatory requirements of certain third countries and territories for the purposes of the treatment of exposures, in accordance with the Capital Requirements Regulation or CRR (575/2013).
EC published the Implementing Regulation 2021/1751, which lays down implementing technical standards on uniform formats and templates for notification of determination of the impracticability of including contractual recognition of write-down and conversion powers.