TCH Study Shows G-SIB Capital Surcharges Unnecessary
The Clearing House Association released a study examining capital levels during the economic crisis as well as the capital levels that banks would be required to meet under the proposed Basel III requirements and the proposed G-SIB capital surcharge. TCH's study shows that the Basel III capital requirements, without an additional G-SIB surcharge, are a prudent standard to maintain financial stability during episodes of financial stress. The study finds that relative to pre-crisis levels, banks would have to raise an additional 100% more capital, or $525 billion in common equity, to meet Basel III’s 7% common equity capital requirement (from $525 to $1050 billion). The study also reveals that the proposed G-SIB surcharge would decrease bank ROE from 12.1% to 7.2% but reduce the market required rate of return on equity only from 12.1% to 11.5%. To meet investor’s required rate of return, banks would have to either increase the borrowing costs to their customers or decrease their fixed costs, consequences that would have a negative impact on the economic recovery.