The Federal Reserve is considering a rule change that could save billions of dollars in capital for the nation’s eight largest banks, in a potential victory long sought by the industry, according to four people with knowledge of the matter.
At issue is how the central bank calculates an extra layer of capital it imposes on U.S. global systemically important banks (GSIBs), known as the “GSIB surcharge,” which was introduced in 2015 to increase their safety and soundness.
The Fed is considering updating the data it uses in the calculation, which was fixed in 2015, to adjust for economic growth and in turn more accurately reflect the size of banks relative to the overall economy, the sources said.
Updating these data points or “ratio” would reduce banks’ systemic scores and the resulting capital burden, the people said, asking not to be identified discussing private regulatory matters.
The Fed’s deliberations, which Reuters is reporting for the first time, are ongoing and no decisions have been made, the sources said.
Still, the central bank’s willingness to look into the issue is a major step forward for the GSIBs’ years-long campaign to reduce the surcharge, which had gained little traction until recently. It also shows how a broader fight over capital rules is creating new opportunities for banks to push for other long-sought regulatory concessions.
The potential capital savings for the eight banks, which include JPMorgan, Citigroup and Bank of America, would depend on several factors, including their business models.
Together, U.S. GSIBs held about $230 billion of capital due to the surcharge as of the first quarter of 2024, according to Fed data, suggesting that even a small change could result in significant savings for some of the banks.
A 0.5% surcharge, for example, is worth more than $8 billion each to JPMorgan and Bank of America, according to a Reuters calculation. That’s money the banks say they could put back into the economy through loans.
Spokespeople for the GSIBs, which also include Wells Fargo, Goldman Sachs, Morgan Stanley, BNY Mellon and State Street, declined to comment or did not immediately respond to requests for comment.
Introduced as a result of the 2009 global financial crisis, the surcharge aims to increase the resilience of GSIBs given the threat they pose to financial stability.
In adopting the rule, the Fed said it was setting the ratios, which relate to a bank’s size, interconnectedness, complexity and international activity, using data from 2012-2013.
The central bank said this approach would improve the predictability of scores and make it easier for banks to plan, but that it would periodically review the framework.
GSIBs say such a review is long overdue. Because banks tend to grow as the economy grows, using an outdated methodology makes them appear larger relative to the overall economy than they really are, they argue.
“U.S. GSIBs are holding more than $59 billion in GSIB capital reserves attributable solely to general economic growth,” JPMorgan wrote in a public letter to the Fed in January.
The Fed is considering updating the ratios to take into account global economic growth in recent years, the sources said, although Reuters was unable to determine precisely how that might be done.
By Pete Schroeder, additional reporting by Paritosh Bansal, Saeed Azhar, Tatiana Bautzer and Nupur Anand in New York
2024-07-09 23:34:54