Impact of Risk-Based Capital surcharges and the Federal Reserve’s FR Y-15 reporting requirements

Mar 30, 2016 –

Banks are facing an endless wave of new regulatory reporting requirements, placing strains on existing data and regulatory reporting infrastructures. As the end of the second quarter of 2016 approaches, banks must now ensure they are going to be able comply with new risk-based capital surcharges, which starts to phase in as of January 1, 2016, and the Federal Reserve’s FR Y-15 Banking Organization Systemic Risk Report, with the new reporting requirements, beginning after year end 2016.

AxiomSL | Inside View - Capital SurchargeIn July of 2015, the Federal Reserve Board (Fed) approved a final rule impacting risk-based capital surcharges. The new rules require a global systemically important bank holding company (GSIB), to hold additional capital, compared to other banks. The goal is to increase its resilience and to reduce the potential risk of financial instability for the United States. Janet Yellen, the Chair of the Federal Reserve states “A key purpose of the capital surcharge is to require the firms themselves to bear the costs that their failure would impose on others. In practice, this final rule will confront these firms with a choice: they must either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink their systemic footprint, reducing the harm that their failure would do to our financial system. Either outcome would enhance financial stability.”

Separately, as 2015 came to a close, the Federal Reserve released amendments to the FR Y-15 reflecting the final GSIB capital surcharge measurements. The FR Y-15, started in 2013, was originally designed by the Federal Reserve to collect consolidated systemic risk data from large U.S. bank holding companies (BHCs). The Fed adopted the BCBS developed indicator-based approach for determining the GSIB surcharge that focuses on those aspects of a BHC’s operations that are likely to generate negative externalities in the case of its failure.

The 5 changes to the FR Y-15 include:

  • Increasing the reporting frequency of the FR Y–15 from annual to quarterly
  • Expanding the reporting panel to include certain savings and loan holding companies
  • Revising the calculation methodology for the systemic indicators to align with the Board’s regulatory capital rules and international accounting standards
  • Allowing respondents to construct their own exchange rates for converting payments data
  • Incorporate instructional clarifications

For the eight banks identified by the Fed as GSIBs, the GSIB surcharge will be phased in from January 1, 2016 to January 1, 2019. BHC’s over $50 billion in consolidated total assets that are not “advanced approaches” banks must perform one of the indicator measures to determine if they meet the GSIB threshold.

In order for banks to keep pace with the complexity of regulatory changes while containing costs and delivering the transparency and risk granularity demanded by regulators, it’s essential for institutions to have data-driven, transparent and scalable reporting. Implementing such a process will provide the framework upon which banks deploy tactical and strategic solutions to comply with the volume of reporting requirements. One way in which this can be done is to leverage data from existing reporting processes to allow for effective validation and reconciliation where feasible. AxiomSL provides banks’ with the data management, regulatory reporting and risk management solutions required to administer all internal data requirements; simplify, standardize and automate processes; and improve data integrity to successfully enhance analysis and decision-making for meeting regulatory mandates.

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