House Republicans ask Fed to lower capital requirements for megabanks

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A group of 29 Republicans on the House Financial Services Committee — including some who could chair the panel next year — have signed a letter asking the Federal Reserve to “recalibrate” a capital surcharge for the biggest and most systemically significant banks.

The July 27 letter, obtained by American Banker, implored Federal Reserve Vice Chairman for Supervision Randal Quarles to reconsider the Fed’s capital surcharge for global systemically important banks, or G-SIBs. The lawmakers argued that the surcharge goes beyond the international minimum requirements and is no longer necessary in light of other post-crisis regulatory changes.

“We are concerned that the surcharge has become duplicative of other post-crisis regulations,” the letter said. “As a result, there is great concern that the surcharge calculation, as currently constructed, is putting unwarranted capital burdens on U.S. banks.

“We believe it is imperative that the Federal Reserve recalibrate the surcharge now,” the letter continues. “Doing so would promote the economic growth and bring efficiencies to the post-crisis regulatory framework.”

A Fed spokesman said that the agency has “received the letter and plan[s] to respond.”

Among the signatories to the letter are Reps. Blaine Luetkemeyer, R-Mo., Bill Huizenga, R-Mich., and Patrick McHenry, R-N.C. — considered to be the three leading contenders to replace chairman Jeb Hensarling, R-Texas, as top Republican on the committee in the next Congress. Hensarling announced his retirement last November, and was not a signatory to Friday’s letter.

The surcharge requires the eight U.S. G-SIBs — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Morgan Stanley, Goldman Sachs, State Street and BNY Mellon — to apply an additional 1%-4.5% to their minimum capital requirements, and the size of the surcharge depends on a number of factors, such as size, risk, complexity and reliance on short-term wholesale funding.

JPMorgan Chase has the highest surcharge, at 3.5%, followed by Morgan Stanley, Citigroup and Bank of America with 3% each, though those surcharges are still being phased in.

The G-SIB surcharge has taken on a new significance in recent months. The Fed in April unveiled a pair of proposals; the first would peg the enhanced supplementary leverage ratio to a bank’s G-SIB surcharge, while the other would apply the G-SIB surcharge to a bank’s minimum capital requirement.

Banks have been critical of those moves precisely because they more deeply incorporate the G-SIB surcharge into the Fed’s capital regime for the largest banks.

Quarles and Fed Chairman Jerome Powell have given somewhat conflicting messages related to the surcharge. Quarles said in his testimony before the House committee in April that the “original calculation of [the surcharge] was made a number of years ago” and that the logic behind the surcharge was to offset the risk of default, which has been lessened elsewhere through the living will process.

“I think it's generally accepted that that has resulted in improvement in resolvability of the firms and that means that the consequence of their default is less, and the reason for the GSIB surcharge is precisely our assessment of the heightened consequence of their default,” Quarles said. “I don't know exactly what the size of that effect is, what the outcome of that would be but then a process of thinking about is appropriate now.”

But Powell has also said on several occasions that he believed that the overall capital levels for the big banks are “about right” and said in April that the Fed’s “expectations of the largest, most complex, systemically important firms are the highest, and they are very high, and they are going to remain very high.”

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