The Fed’s capital reform proposals (thinner capital buffers)
In a March 12, 2026 speech by Michelle Bowman, Vice Chair for Supervision at the Federal Reserve, at the Cato Institute, she previewed and justified the capital reform proposals that the Fed was expected to formally publish the following week.
Her core argument was that the current G-SIB surcharge had become “disassociated from actual risk,” escalating over time simply due to economic growth and inflation rather than increases in actual systemic risk. The speech outlined four specific G-SIB surcharge modifications: recalibrating coefficients to align with international standards, restoring the short-term wholesale funding component to its intended 20% weight, requiring daily/monthly averaging to reduce year-end balance sheet manipulation, and shifting from 50 bps to 10 bps surcharge increments to reduce cliff effects. She framed the overall package as a “sensible recalibration” that maintains capital above 2019 levels while removing excessive and redundant requirements that push credit activity into the unregulated nonbank sector.
Capital Rules for the Real Economy
By: Michelle W. Bowman – Federal Reserve
…with too-big-to-fail banks, regulators intervene later at lower ratios
In this paper Allen N. Berger, Simona Nistor, Steven Ongena, and Sergey Tsyplakov use a hand-collected dataset of bailouts from 110 banks across 22 EU countries during 2008–2014, covering both the Global Financial Crisis and the European Sovereign Debt Crisis. The authors analyze the entire bailout process and also construct a “Harshness Index” based on five restriction types: regulatory fees, dividend bans, board intrusions, executive pay limits, and operating restrictions.
Findings
The results strongly contradict conventional wisdom. While Global Systemically Important Banks (G-SIBs) are indeed bailed out more often than non-G-SIBs, every other dimension of treatment is harsher:
- Regulators wait until G-SIBs reach lower capital ratios before intervening (3.04% average equity/assets for G-SIBs vs. 5.38% for non-G-SIBs on capital injections)
- Bailout amounts are smaller relative to asset size for G-SIBs, restrictions during the bailout period are significantly more severe, and regulators withdraw support sooner, at lower capital ratios, for G-SIBs.
Do “Too-Big-To-Fail” Banks Receive Preferential Treatment in Bailouts? Surprising Results from a Cross-Country Analysis
Authors: Allen N. Berger, Simona Nistor, Steven Ongena, Sergey Tsyplakov
University of South Carolina
From: University of South Carolina, Babeṣ-Bolyai University of Cluj-Napoca, University of Zurich
… and as a result, bail-in is unavailable or unworkable at that stage
In this paper Maurizio Trapanese synthesizes a broad body of economic literature to assess the conditions under which bail-in can work efficiently, using a theoretical and legal-analytical approach rather than econometrics. He also conducts a detailed institutional analysis of the EU’s primary legislation (BRRD and SRMR), identifying specific provisions where the minimum conditions for an efficient bail-in regime are likely to fail in practice. Five concrete areas of the EU framework are examined: prediction of resolution outcomes, resolution triggers, selection of tools, exemption of liabilities from bail-in, and restrictions on holdings of bail-in capital instruments.
Findings
- Bail-in works best for idiosyncratic failures, not systemic crises. The paper argues that the post-GFC bail-in design assumes banks fail one at a time, whereas historically bank failures are clustered during system-wide distress, precisely when bail-in is least viable.
- The EU bail-in framework is excessively discretionary and complex. Multiple overlapping authorities, wide exemption clauses, and non-automatic triggers make it impossible for investors to predict outcomes with sufficient certainty, thereby undermining market discipline and failing to reduce moral hazard.
- Bail-in cannot fully end the too-big-to-fail (TBTF) problem on its own. It should be treated as one element of a broader policy mix that still includes, under certain systemic conditions, public backstops.
- Credit Suisse is implicitly the empirical reference point: Trapanese uses it to illustrate how real-world resolution of a large bank diverged sharply from the theoretical bail-in model.
Financial stability considerations on bail-in
Authors: Maurizio Trapanese
From: Banca d’Italia
…talking about Credit Suisse
As mentioned above, Credit Suisse is the empirical precedent for exactly this chain of events outlined above.
Cyril Monnet, Dirk Niepelt, and Remo Taudien, in this paper, examine Switzerland’s proposed Public Liquidity Backstop (PLB) for systemically important banks. They find that the PLB, like other too-big-to-fail policies, subsidizes risky bank behavior by distorting debt pricing and encouraging excessive leverage. Corrective measures must be applied before any crisis, as ex-post conditions are largely ineffective. In addition, the Swiss government’s proposed ex-ante PLB fee (assessment rate of 0.5–1.5 basis points, totalling CHF 0.07–0.21bn for all SIBs in 2022) is orders of magnitude smaller than the actual TBTF subsidy. The authors suggest for policymakers to develop a comprehensive set of corrective measures, including stricter equity requirements and broader regulatory tools, rather than targeting PLB support in isolation.
Pricing Liquidity Support: A PLB for Switzerland
Author: Cyril Monnet, Dirk Niepelt, Remo Taudien
From: University of Bern
