Calibrating the GSIB Surcharge
PrintAbstract
This white paper discusses how to calibrate a capital surcharge that tracks the systemic footprint of a global systemically important bank holding company (GSIB). There is no widely accepted calibration methodology for determining such a surcharge. The white paper focuses on the "expected impact" framework, which is based on each GSIB's expected impact on the financial system, understood as the harm it would cause to the financial system were it to fail multiplied by the probability that it will fail. Because a GSIB's failure would cause more harm than the failure of a non-GSIB, a GSIB should hold enough capital to lower its probability of failure so that its expected impact is approximately equal to that of a non-GSIB.
Applying the expected impact framework requires several elements. First, it requires a method for measuring the relative harm that a given banking firm's failure would cause to the financial system--that is, its systemic footprint. This white paper uses the two methods as set forth in the GSIB surcharge rule to quantify a firm's systemic impact. Those methods look to attributes of a firm that are drivers of its systemic importance, such as size, interconnectedness, and cross-border activity. Both methodologies use the most recent data available, and firms' scores will change over time as their systemic footprints change. Second, the expected impact framework requires a means of estimating the probability that a firm with a given level of capital will fail. This white paper estimates that relationship using historical data on the probability that a large U.S. banking firm will experience losses of various sizes. Third, the expected impact framework requires the choice of a "reference" bank holding company: a large, non-GSIB banking firm whose failure would not pose an outsized risk to the financial system. This white paper discusses several plausible choices of reference BHC.
With these elements, it is possible to estimate a capital surcharge that would reduce a GSIB's expected impact to that of a non-GSIB reference BHC. For each choice of reference BHC, the white paper provides the ranges of reasonable surcharges for each U.S. GSIB.
