WASHINGTON — Banks and public interest groups are squaring off on whether the Federal Reserve Board should extend its proposed capital surcharge on the largest and most complex U.S. banks to be included in the agency's annual stress test analyses.

In comments filed to the central bank, a number of banks and their associations asked the Fed to expressly exclude the proposed buffer on global systemically important banks, or G-SIBs, from the calculations for the annual stress test regime.

The "surcharge should not be treated as an add-on minimum requirement to be maintained in order to 'pass' stress tests," said Paul Ackerman, executive vice president and treasurer at Wells Fargo. "To do so would convey to market participants that the buffer is not available to absorb losses and, therefore, diminish the effectiveness of the buffer's intent — to reduce a G-SIB's probability of default."

The Securities Industry and Financial Markets Association, the Clearing House and Financial Services Roundtable — groups that represent many of the largest U.S. banks subject to the surcharge — echoed that sentiment in a joint comment. They argued that making the surcharge part of the stress test analysis would be "unnecessarily duplicative" for the affected banks.

Because the G-SIB banks are the largest and most complex, they are already subject to many different requirements under the stress tests that ensure that they remain afloat under different circumstances. Effectively raising the capital requirements for those banks, therefore, would not boost their resilience in an appreciable way, the groups said.

"As currently constructed, the [Comprehensive Capital Analysis and Review] requires a G-SIB to emerge as a viable going concern from the combination of a severely adverse macroeconomic stress scenario, a large counterparty default scenario, and a global market shock scenario, as applicable, at the same level of capital as a non-GSIB would emerge from the severely adverse macroeconomic stress scenario alone," the groups' comments said. "As such, incorporating the G-SIB surcharge into required post-stress minimums would effectively ignore the fact that G-SIBs are already subject to more stringent stress testing requirements to begin with."

Hugh Carney, vice president of capital policy at the American Bankers Association — a trade group that also represents many G-SIB banks — said in his comments that the inclusion of the surcharge as an "add-on minimum requirement" to pass the CCAR stress test would be counterproductive, because it would "convey to market participants that the buffer is not available to absorb losses and, therefore, diminish the effectiveness of the buffer's intent — to reduce a G-SIB's probability of default."

But Dennis Kelleher, president of public interest group Better Markets, argued that the G-SIB surcharge is a capital requirement like any other, and as such should be included with other capital requirements that are examined during the stress tests. Including the surcharge "would allow a dynamic regulatory reaction to new risk stemming from changes in financial markets and business models of the financial institutions" subject to the surcharge, Kelleher said.

The proposal, which the Fed issued on Dec. 9, closely resembles the rule developed by the international Financial Stability Board that requires G-SIBs to hold between 1 to 2.5% additional capital to offset risks posed by their size and/or complexity. The FSB G-SIB rule applies to 30 banks worldwide, including eight U.S. banks.

The Fed rule differs from the FSB rule, however, in that the central bank included an additional capital charge tied specifically to a bank's reliance on short-term wholesale funding. The Fed noted prior to the proposal's publication that it estimated that nearly all of the banks subject to the rule would already be in compliance. During the vote on the proposal, Fed Vice Chairman Stanley Fischer let it slip that JPMorgan Chase alone would be subject to the additional capital requirements tied to short-term wholesale funding, requiring some $22 billion in additional capital.

The Fed did not include the G-SIB surcharge as part of the stress test capital standards — the minimum capital requirements that banks would have to meet even under severely adverse scenarios outlined each year by the Fed.

In the proposal, the board said that it "will be analyzing in the coming year whether the board's capital plan and stress test rules should also include a form of G-SIB surcharge" but noted that, if it were to include the surcharge in stress tests, "the board would do so through a separate notice of proposed rulemaking."

The ABA's argument that including the G-SIB buffer as part of the risk-based capital requirement in the stress tests would effectively bar the banks from using that capital in times of stress may gain some traction with the Fed's top regulators.

Fed Gov. Daniel Tarullo echoed a similar concern regarding the agency's liquidity coverage ratio in a speech last November, where he said the Fed "may be more successful in enforcing the maintenance of liquid asset buffers in normal times for use in stress periods than we will be in encouraging their use when such a stress period arrives."

Banks and public interest groups also sparred on the more central aspects of the rule.

Marcus Stanley, policy director for Americans for Financial Reform, another public interest group, said that short-term wholesale funding "clearly poses a run risk" and the Fed's proposal to use that reliance as a metric for systemic risk "is supported by common sense." Despite this praise, Stanley said the capital levels envisioned in the proposal "remain inadequate."

"Numerous studies and books have documented the significance of disruptions in short-term wholesale funding markets in the origins and spread of the 2008 financial crisis, as well as the strong statistical relationship between dependence on short-term wholesale funding and the likelihood of bank failure," Stanley wrote.

The ABA's Carney, by contrast, noted that the proposal would rely on the Basel Committee to assess banks' size and complexity for the purposes of the rule — a process that involves the analysis of data provided by bank regulators from around the globe but that is poorly understood by the banks themselves or the general public.

"Neither the U.S. banks nor the public know who the U.S. banks are being compared against, which foreign regulators are providing the data, and whether the numbers are accurate and comparable to the information provided by U.S. institutions," Carney said.

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