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Calibrating the GSIB Surcharge


The Dodd-Frank Wall Street Reform and Consumer Protection Act 1 mandates that the Board of Governors of the Federal Reserve System adopt, among other prudential measures, enhanced capital standards to mitigate the risk posed to financial stability by systemically important financial institutions (SIFIs). The Board has already implemented a number of measures designed to strengthen firms' capital positions in a manner consistent with the Dodd-Frank Act's requirement that such measures increase in stringency based on the systemic importance of the firm.

As part of this process, the Board has proposed a set of capital surcharges to be applied to the eight U.S. bank holding companies (BHCs) of the greatest systemic importance, which have been denominated global systemically important bank holding companies (GSIBs). Setting such an enhanced capital standard entails (1) measuring the risk that a given GSIB's failure poses to financial stability (that is, the GSIB's systemic footprint) and (2) estimating how much additional capital is needed to mitigate the systemic risk posed by a firm with a given systemic footprint.

This white paper explains the calibration of the capital surcharges, based on the measures of each GSIB's systemic footprint derived from the two methods described in the GSIB surcharge final rule and discussed in detail in the preamble to the rule. Because there is no single widely accepted framework for calibrating a GSIB surcharge, the Board considered several potential approaches. This paper focuses on the "expected impact" framework, which is the most appropriate approach for helping to scale the level of a capital surcharge. This paper explains the expected impact framework in detail. It provides surcharge calibrations resulting from that framework under a range of plausible assumptions, incorporating the uncertainty that is inherent in the study of rare events such as systemic banking failures. This paper also discusses, at a high level, two alternative calibration frameworks, and it explains why neither seemed as useful as a framework for the calibration of the GSIB surcharge.


The failures and near-failures of SIFIs were key drivers of the 2007-08 financial crisis and the resulting recession. They were also key drivers of the public-sector response to the crisis, in which the United States government sought to prevent SIFI failures through extraordinary measures such as the Troubled Asset Relief Program. The experience of the crisis made clear that the failure of a SIFI during a period of stress can do great damage to financial stability, that SIFIs themselves lack sufficient incentives to take precautions against their own failures, that reliance on extraordinary government interventions going forward would invite moral hazard and lead to competitive distortions, and that the pre-crisis regulatory focus on microprudential risks to individual financial firms needed to be broadened to include threats to the overall stability of the financial system.

In keeping with these lessons, post-crisis regulatory reform has placed great weight on "macroprudential" regulation, which seeks to address threats to financial stability. Section 165 of the Dodd-Frank Act pursues this goal by empowering the Board to establish enhanced regulatory standards for "large, interconnected financial institutions" that "are more stringent than the standards ... applicable to [financial institutions] that do not present similar risks to the financial stability of the United States" and "increase in stringency" in proportion to the systemic importance of the financial institution in question.2 Section 165(b)(1)(A)(i) of the act points to risk-based capital requirements as a required type of enhanced regulatory standard for SIFIs.

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Rationales for a GSIB Surcharge

The Dodd-Frank Act's mandate that the Board adopt enhanced capital standards to mitigate the risk posed to financial stability by certain large financial institutions provides the principal statutory impetus for enhanced capital requirements for SIFIs. Because the failure of a SIFI could undermine financial stability and thus cause far greater negative externalities than could the failure of a financial institution that is not systemically important, a probability of default that would be acceptable for a non-systemic firm may be unacceptably high for a SIFI. Reducing the probability that a SIFI will default reduces the risk to financial stability. The most straightforward means of lowering a financial firm's probability of default is to require it to hold a higher level of capital relative to its risk-weighted assets than non-SIFIs are required to hold, thereby enabling it to absorb greater losses without becoming insolvent.

There are also two secondary rationales for enhanced capital standards for SIFIs. First, higher capital requirements create incentives for SIFIs to shrink their systemic footprint, which further reduces the risks these firms pose to financial stability. Second, higher capital requirements may offset any funding advantage that SIFIs have on account of being perceived as "too big to fail," which reduces the distortion in market competition caused by the perception and the potential that counterparties may inappropriately shift more risk to SIFIs, thereby increasing the risk those firms pose to the financial system. Increased capital makes GSIBs more resilient in times of economic stress, and, by increasing the capital cushion available to the firm, may afford the firm and supervisors more time to address weaknesses at the firm that could reverberate through the financial system were the firm to fail.

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1. Pub. L. No. 111-203, 124 Stat. 1376 (July 21, 2010). Return to text

2. Section 165(a)(1). Return to text

Last update: August 3, 2015

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