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Proposed alongside the risk weighting reforms known as the Basel III endgame this summer, the Federal Reserve's suggested updates to the global systemically important bank, or GSIB, surcharge aims to align banks' capital requirements more closely with their systemic profile.
The GSIB surcharge is an additional capital charge applied to the eight largest and/or most systemically important banks in the country — Bank of America, BNY Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo — on top of standard capital requirements.
Proponents of the proposed framework say it would be more adaptive to changing risk exposures within banks and prevent so-called "window dressing" — a practice in which banks clean up their balance sheets before year-end reporting deadlines — by requiring banks to disclose exposures based on daily averages, rather than a single moment in time.
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... the Institute of International Bankers and Bank Policy Institute, filed a comment letter with the Fed earlier this month. In it, they criticized the proposal to count derivatives between affiliated entities as cross-jurisdictional assets. Doing so, they argue, puts international banks at a disadvantage to their U.S.-based peers and violates standards established during the Fed's 2019 rulemaking on regulatoring tiering.
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Proponents of the rule change say the inclusion of derivatives in the cross-jurisdictional asset calculation was a needed change. In a joint comment letter, Stanford University professor Anat Admati along with University of Michigan assistant professors Jeremy Kress and Jeffrey Zhang, argued that derivatives function similarly to other included assets and can also transmit distress in the same way.
"Further, omitting derivatives from cross-jurisdictional indicators may incentivize banking organizations to transact with overseas counterparties using derivatives in a form of regulatory arbitrage," they wrote. "Conceptually, therefore, derivatives should be included in measures [of] cross-border activity, just like other cross-border claims and liabilities."
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