Estimating How Basel III Liquidity Requirements Should Affect a GSIB Surcharge
This note proposes a recalibration of the global systemically important bank holding company (GSIB) capital surcharge that takes into account the impact of the liquidity coverage ratio (LCR) – one of the post-crisis liquidity requirements – on a GSIB’s probability of failure. Our findings indicate that the favorable impact of liquidity requirements on bank losses should lead to approximately a 25 percent haircut on the GSIB surcharge. As a result, the LCR haircut yields a reduction in the GSIB surcharge between 50 to 100 basis points, depending on each bank’s method 2 surcharge. These results are obtained under the assumption that banks are subject to a 100 percent LCR requirement, and thus understate the impact, as all GSIBs have an LCR over 100 percent in practice.
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