Fed’s Potential Rule Change Could Save Major U.S. Banks Billions

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The U.S. Federal Reserve is contemplating a significant rule adjustment that may result in substantial capital savings for the nation’s largest banks. This consideration marks a potential victory for the banking industry, which has been advocating for such changes for years. The proposed modification centers on the calculation of the “GSIB surcharge,” an additional capital buffer imposed on U.S. global systemically important banks (GSIBs) since 2015.

Revisiting the GSIB Surcharge Calculation
The GSIB surcharge was introduced to enhance the resilience of the largest banks in response to the global financial crisis of 2009. The calculation of this surcharge involves various coefficients that measure a bank’s size, interconnectedness, complexity, and cross-border activity. These coefficients were fixed based on data from 2012-2013. However, the banking industry argues that these inputs are outdated and do not accurately reflect the current economic landscape.

According to sources familiar with the matter, the Federal Reserve is now considering updating these coefficients to better align with recent economic growth. Such an update would likely lower the systemic scores for the banks, thereby reducing the capital surcharge. This adjustment could lead to significant capital savings for the eight largest U.S. banks, including JPMorgan Chase, Citigroup, and Bank of America.

Impact on Capital Reserves
In the first quarter of 2024, U.S. GSIBs collectively held around $230 billion in capital due to the surcharge. Even a modest reduction in the surcharge could translate into billions of dollars in savings. For instance, a 0.5% decrease could mean more than $8 billion each for JPMorgan Chase and Bank of America. Banks argue that these savings could be reinvested into the economy through increased lending.

While the Federal Reserve’s deliberations are ongoing and no final decisions have been made, the willingness to review the coefficients marks a significant step forward for GSIBs. The central bank’s move comes amidst a broader debate over capital rules, which has opened new opportunities for banks to seek regulatory relief.

Historical Context and Industry Lobbying
The GSIB surcharge was implemented to ensure that the largest banks maintain robust capital buffers, reducing the risk they pose to financial stability. Initially, the fixed coefficients were intended to provide predictability and ease in planning for banks. However, industry leaders have long contended that the methodology is outdated, making the banks appear disproportionately large relative to the global economy.

JPMorgan Chase highlighted this issue in a public letter to the Fed, stating that U.S. GSIBs are holding over $59 billion in additional capital buffers solely due to general economic growth. The banking industry has been pushing for a review of the coefficients, arguing that an update is overdue.

Basel Endgame Proposal and Broader Implications
The Federal Reserve’s consideration of revising the GSIB surcharge coefficients is occurring alongside another significant regulatory development—the “Basel Endgame” proposal. This proposal, introduced last year by the Fed and two other regulators, aims to increase capital requirements for GSIBs and other large banks to better reflect the risk of bank losses.

The Basel Endgame proposal has sparked intense lobbying from the banking industry, which argues that the increased capital requirements could constrain lending. While the Fed is sympathetic to these concerns, any concessions must be agreed upon by other regulators, who may be less willing to accommodate the banks’ requests.

Updating the GSIB surcharge coefficients could be a way for the Fed to independently offset the impact of the Basel Endgame proposal. However, sources indicate that the two projects are proceeding independently. If the Fed decides to change the coefficients, it may re-propose the rule for additional public feedback, potentially delaying a final decision by several months.

Notable Banks Reporting Second Quarter Earnings this Week

Citigroup Inc

JPMorgan Chase & Co.

Wells Fargo & Co.

The Federal Reserve’s potential revision of the GSIB surcharge calculation represents a significant development for the banking industry. By updating the coefficients to reflect recent economic growth, the Fed could reduce the capital burden on the largest U.S. banks, freeing up billions of dollars that could be reinvested into the economy. As the deliberations continue, the banking industry will be closely watching for any changes that could provide much-needed regulatory relief.

by Steve Macalbry

Senior Editor,


Disclaimer: This article is intended for informational purposes only. It should not be considered financial or investment advice. We do not hold any form of equity in the securities mentioned in this article. Always consult with a certified financial professional before making any financial decisions. Growth stocks carry a high degree of risk, and you could lose your entire investment.


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