The Federal Reserve Board is asking for comments on proposed rulemaking for the G-SIB surcharge. This article looks at interesting information in the published document.

Background

The federal bank regulatory agencies have requested comment on three proposals to modernise the regulatory capital framework for banks. One of these proposals, would improve how systemic risk is measured in the framework for determining the additional capital requirement for the largest and most complex banks, aka the G-SIB Surcharge.

I wrote about this last week, but now we have the full details published.

The federal agencies press release for the proposed rulemaking includes the following:

“While the agencies anticipate that the amount of overall capital in the banking system would modestly decrease as a result of these proposals, capital levels would still be substantially higher than they were before the financial crisis. In aggregate, the proposals would modestly reduce capital requirements for large banks and moderately reduce requirements for smaller banks, reflecting their more traditional lending activities.“

Let’s look into the detail.

Estimated Impact on Surcharges

Starting with Table 8 from the full document (128 pages) available here.

• A reduction from the Baseline 2.7% average to the Proposal 2.3% average, a modest 0.4% decrease or 10% reduction in aggregate surcharge capital
• The highest (JP Morgan Chase), reducing from 4.5% to 4.3%, so a more modest 0.2%
• The lowest (State Street), no change from 1%
• Three Alternatives to the Proposal, with greater reductions

An interesting point is that under the Proposal and Alternatives, Method 2 will no longer be the binding constraint (higher score) for two G-SIBs.

The full document, also estimates the impact of specific changes on Method 2 G-SIB Scores, as shown in the following Table 7 (from page 78).

Method 2 Coefficient Adjustments and Short-Term Wholesale Funding Changes, each making significant reductions in Method 2 Scores, with Systemic Indicator Changes contributing a small increase.

Coefficient Adjustments

Existing Method 2 Coefficients, which are used to weight each of the input metrics, have not changed since 2015 and the Proposal provides for the:

• One-time adjustment to the Coefficients for size, interconnectedness, complexity, and cross-jurisdictional activity categories by a downward adjustment by a factor of 1.2
• Annual Indexing of Coefficients by Nominal GDP Growth

The justification for the first of these is shown in Figure 2 (from page 17), charting that divergence from the international Basel Method 1 has increased to 20% since 2019.

Providing the justification for the 1.2 reduction.

The annual indexing adjustment is based on the three-year moving average of annual nominal U.S. gross domestic product (GDP) growth and is best read in the full document, see page 19.

Alternatives

Alternative 1, instead of a one-time adjustment and annual indexing by GDP growth, proposes inflation indexing and so updates coefficients by multiplying the corresponding baseline coefficients by the ratio of the CPI-W index’s value as of December 31, 2015, to the CPI-W index’s value as of December 31, 2024, which has increased 34%.

Alternative 2, global denominators, updates coefficients by multiplying the indicator’s weight by 20,000 and dividing the result by the product of the average of the corresponding euro-denominated aggregate global indicator amounts as of the end of 2023 and 2024 published by the Bank for International Settlements and the average of daily euro-U.S. dollar exchange rates from 2022 to 2024.

Alternative 3, reference bank approach, would reduce all method 2 systemic indicator coefficients by 40 percent, which is the cumulative growth rate differential between the method 2 scores and the method 1 scores of the “reference bank” used in the original calibration of the GSIB surcharge framework, estimated from the fourth quarter of 2015 to the fourth quarter of 2024.1

Short-Term Wholesale Funding

There are two elements to the Proposal:

• Modification of the Short-Term Wholesale Funding Score to remove the Risk-Weighted Assets Denominator
• Weight the Short-Term Wholesale Funding Score to represent approximately 20 Percent of Total Method 2 GSIB Scores (as was the intention in the original 2015 rule).

That’s All

That’s all I have time for today.

There is a lot more detail in the full document.

The Federal Reserve Board is asking for comments.

With 38 questions, the last one being “What other modifications, if any, should the Board consider to this proposal due to the capital proposals?

Comments must be received on or before June 18, 2026.

And will be published on the Board’s website here.