The Federal Reserve posted testimony by Governor Daniel Tarullo before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, on Tuesday. Tarullo discussed capital surcharges for Global Systemically Important Banks (GSIBs) with a penalty based on short-term wholesale funding, among other things. On GSIBs, Tarullo said, "An important remaining Federal Reserve initiative to improve GSIB resiliency is our forthcoming proposal to impose graduated common equity risk-based capital surcharges on U.S. GSIBs. The proposal will be consistent with the standard in section 165 of the Dodd-Frank Act that capital requirements be progressively more stringent as the systemic importance of a firm increases. It will build on the GSIB capital surcharge framework developed by the BCBS, under which the size of the surcharge for an individual GSIB is a function of the firm's systemic importance. By further increasing the amount of the most loss-absorbing form of capital that is required to be held by firms that potentially pose the greatest risk to financial stability, we intend to improve the resiliency of these firms. This measure might also create incentives for them to reduce their systemic footprint and risk profile. While our proposal will use the GSIB risk-based capital surcharge framework developed by the BCBS as a starting point, it will strengthen the BCBS framework in two important respects. First, the surcharge levels for U.S. GSIBs will be higher than the levels required by the BCBS, noticeably so for some firms. Second, the surcharge formula will directly take into account each U.S. GSIB's reliance on short-term wholesale funding. We believe the case for including short-term wholesale funding in the surcharge calculation is compelling, given that reliance on this type of funding can leave firms vulnerable to runs that threaten the firm's solvency and impose externalities on the broader financial system."
