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TCH Calls on the Basel Committee to Go Back to the Drawing Board on GSIB Surcharge

TCH says the Basel Committee methodology is flawed
and its proposed changes unfairly affect four U.S. banks



Sean Oblack


Washington D.C. – June 27, 2017 – The Clearing House (TCH) filed a comment letter with the Basel Committee on Banking Supervision in response to its Consultative Document proposing changes to its surcharge assessment framework for global systemically important banks (G-SIBs).  In the letter, TCH expresses serious concerns about certain inappropriate proposed changes, which would disproportionately and adversely affect four U.S. banks.  TCH also details the broader framework’s conceptual and methodological flaws and calls for the Basel Committee to comprehensively revise the framework to reflect the actual systemic risks posed by G-SIBs, and thereby align it with its stated objectives.


The Clearing House wrote,  “We continue to believe that the more appropriate course of action is to revisit and correct the G-SIB surcharge framework’s flawed foundations, rather than exacerbate these problems through inappropriate and incremental changes to its components, as the Consultative Document proposes to do.”

Among other changes, the Basel Committee proposes removing the cap on the substitutability category, which is largely a measure of the degree to which a bank provides custody, payments, underwriting and trading services.  The cap was introduced by the Basel Committee as part of the original surcharge methodology in recognition of the outsized and inappropriate consequences the substitutability category would otherwise have on GSIBs providing these services, and its relative weakness, as a volume-based indicator and measure of susceptibility to failure.  Removal of the cap without correcting other flaws in the surcharge methodology would therefore simply increase the importance of this category while lessening the importance of other, more appropriate measures of financial resilience.  Moreover, the removal of the cap is particularly concerning since the changes are based on erroneous assumptions about the nature of the underlying activities and would likely result in the most capable and scalable market participants being forced to reduce their activities, thereby increasing the costs and reducing the efficiency of such services.  These increased costs would, in turn, flow through to end users.


The letter reiterates larger flaws inherent in the Basel Committee’s underlying G-SIB assessment methodology which rests on theoretical foundations that lack quantitative or qualitative support, are not transparent, and create substantial economic costs that have not been appropriately considered (or empirically analyzed).   In doing so, it does not account for the deleterious consequences this may have on net financial stability as such activities would migrate outside the banking system.


“Finally, we strongly urge the U.S. bank regulators to publish this proposal for notice and comment pursuant to the Administrative Procedure Act before any adoption by the Basel Committee.  Such process is particularly demanded here, where the Basel Committee is considering a proposal that would significantly raise capital requirements only on U.S. banks,” added Greg Baer, President of The Clearing House Association. 


About The Clearing House.  The Clearing House is a banking association and payments company that is owned by the largest commercial banks and dates back to 1853.  The Clearing House Payments Company L.L.C. owns and operates core payments system infrastructure in the United States and is currently working to modernize that infrastructure by building a new, ubiquitous, real-time payment system.  The Payments Company is the only private-sector ACH and wire operator in the United States, clearing and settling nearly $2 trillion in U.S. dollar payments each day, representing half of all commercial ACH and wire volume.  Its affiliate, The Clearing House Association L.L.C., is a nonpartisan organization that engages in research, analysis, advocacy and litigation focused on financial regulation that supports a safe, sound and competitive banking system. 

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