Global regulators’ new proposal to adjust the calculation of key risk metrics for major banks could impact their short-term funding operations in the U.S., marking another step in the ongoing push for stricter capital regulations. This initiative targets the end-of-year practice known as “window dressing,” where banks manage their business to minimize the capital surcharge determined by the risk measures on December 31st.
Notably, JPMorgan Chase and Bank of America managed to lower their risk metrics at the end of the last year, dodging an additional surcharge that could have exceeded $8 billion for each. The Basel Committee on Banking Supervision has suggested calculating these metrics using daily averages throughout the year instead of single end-of-year snapshots, a method also supported by the U.S. Federal Reserve.
This approach, aimed at curbing window dressing, could notably affect the banks’ profitability from the U.S. repo market, increasing costs for various market participants and potentially impacting the Treasury markets and government debt issuance.
The proposed changes are intended to enhance global financial stability by providing a more accurate view of banks’ risk profiles throughout the year and could lead to a more stable repo market by avoiding the end-of-year rate spikes caused by current practices.
Despite potential benefits for market stability, the banking industry has shown resistance, suggesting alternatives like monthly or quarterly averages instead of daily calculations. Critics within the industry also argue that the current surcharge calculation doesn’t account for factors like economic growth that can inflate capital requirements without an actual increase in risk.
The Global Systemically Important Banks (GSIB) surcharge, devised after the 2008 crisis to buffer major banks against losses and protect the broader financial system, is at the heart of this debate. With U.S. banks required to report risk metrics quarterly, the proposed changes could significantly alter how these metrics—and thus the surcharges—are calculated, affecting not just end-of-year figures but the banks’ operations throughout the year.
The discussions surrounding this proposal highlight the complex balance between regulatory oversight aimed at ensuring financial stability and the operational and strategic adjustments banks make in response to such regulations.