[6] However, some economists warned in 2012 that the tighter Basel III capital regulation, which is primarily based on risk-weighted assets, may further negatively affect the stability of the financial system.
It is up to each country's specific lawmakers and regulators to enact whatever portions of the recommendations they deem appropriate for their own domestic systemically important banks (D-SIBs) or national SIFIs (N-SIFIs).
[citation needed] Global Systemically Important Banks (G-SIBs) are determined based on four main criteria: (a) size, (b) cross-jurisdiction activity, (c) complexity, and (d) substitutability.
[citation needed] In the United States, the largest banks are regulated by the Federal Reserve (FRB) and the Office of the Comptroller of Currency (OCC).
These regulators set the selection criteria, establish hypothetical adverse scenarios and oversee the annual tests.
Banks showing difficulty under the stress tests are required to postpone share buybacks, curtail dividend plans and if necessary raise additional capital financing.
[citation needed] In December 2014, the Federal Reserve Board (FRB) issued a long-awaited proposal to impose additional capital requirements on the U.S.’s global systemically important banks (G-SIBs).
[12] The proposal implements the Basel Committee on Banking Supervision’s (BCBS) G-SIB capital surcharge framework that was finalized in 2011, but also proposes changes to BCBS’s calculation methodology resulting in significantly higher surcharges for US G-SIBs compared with their global peers.
The first method is consistent with BCBS’s framework, and calculates the amount of extra capital to be held based on the G-SIB’s size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity.
The second method is introduced by the U.S. proposal, and uses similar inputs but replaces the substitutability element with a measure based on a G-SIB’s reliance on short-term wholesale funding (STWF).
(Goldfield 2013) harv error: no target: CITEREFGoldfield2013 (help)[14] Goldfield, a former Senior Partner of Goldman Sachs and Economics Professors, Jeremy Bulow at Stanford and Paul Klemperer at Oxford, argue that Equity Recourse Notes' (ERNs), similar in some ways to contingent convertible debt, (CoCos), should be used by all banks rated SIFI, to replace non-deposit existing unsecured debt.
However, under US law counterparties to qualified financial contracts (QFCs) are exempt from this stay and may usually begin to exercise their contractual rights after the close of business the next day.
[19] In January 2015, the US Secretary of the Treasury issued a notice of proposed rulemaking (NPR) that would establish new recordkeeping requirements for QFCs.
The latter measurement can better capture the effect of derivatives and other products with embedded leverage on the risk undertaken by a nonbank financial company.
The Council may also review a nonbank financial company's debt profile to determine if it has adequate long-term funding, or can otherwise mitigate liquidity risk.
A maturity mismatch affects a company's ability to survive a period of stress that may limit its access to funding and to withstand shocks in the yield curve.
work to develop the methodology for the introduction of HLA requirements, to be published by end-2015, and to be applied starting from January 2019 towards those G-SIIs being identified in November 2017.
[26] The FSOC recently asked the U.S. Treasury Department’s Office of Financial Research (OFR) to undertake a study that provides data and analysis on the asset management industry.
[27] The study analyzed the industry and describes potential threats to U.S. financial stability from vulnerabilities of asset managers.
The study suggested the industry’s activities as a whole make it systemically important and may pose a risk to financial stability.
This request for the study is considered by some as a first step in by the FSOC in reviewing the industry and individual player to determine which are systematically important.
Furthermore, in 2014 the Financial Stability Board and the International Organization of Securities Commissions issued the Consultative Document which proposed methodologies for identifying globally active systemically important investment funds.
Both reports further the conclusion that is likely the U.S. Financial Stability Oversight Council will designate a few large US asset managers as systemically important.