TOP OF THE AGENDA
Former Fed Gov. Daniel Tarullo’s Misplaced Calls For Higher Capital Requirements
In a May 21 speech, former Federal Reserve Governor Daniel Tarullo called for higher capital requirements on the eight U.S. GSIBs and criticized several recently proposed changes to the U.S. stress testing framework as leading to a reduction in U.S. GSIB capital requirements. BPI published a new blog post demonstrating that his criticisms are misplaced. The stress capital buffer (SCB) proposal currently pending would increase the capital requirements of the largest U.S. banks, because it effectively adds the GSIB surcharge to the risk-based post-stress minimums. In addition, the severely adverse scenario and the global market shock in the Dodd-Frank Act Stress Tests (DFAST) are calibrated to yield significantly worse outcomes than those experienced during the last financial crisis and require banks to have substantial capital even after that stress.
5 Stories Driving the Week
1. THE GLOBAL MARKET SHOCK AND BOND MARKET LIQUIDITY
Subjecting banks to the global market shock (GMS) component in the U.S. stress tests reduced their holdings of debt securities by approximately two-thirds. Since large banks conduct key market-making activities, the GMS has a significant impact in reducing liquidity in the corporate bond market, which in turn raises borrowing costs for corporations and, ultimately, consumers. A new BPI blog post analyzes the data and demonstrates why the Federal Reserve should revisit the assumptions imposed by the GMS.
2. SENATE BANKING HOLDS HEARING ON ENDING ANONYMOUS SHELL COMPANIES
On May 21, the Senate Banking Committee held a hearing on ending anonymous shell companies with testimony from FinCEN, FBI and the OCC. The Committee will likely hold an additional hearing on the topic next month as it continues work on beneficial ownership legislation and anti-money laundering reform efforts.
3. POWELL REMARKS THAT FINANCIAL SYSTEM APPEARS RESILIENT ENOUGH TO HANDLE POTENTIAL LOSSES
Federal Reserve Chair Jerome Powell in a May 21 speech noted that the regulatory agencies are striving to get a complete picture of the leveraged loan market, but stated that the financial system today appears resilient enough to handle potential losses.
4. REFURBISHING THE NET STABLE FUNDING RATIO
BPI has been a frequent critic of the Net Stable Funding Ratio (NSFR) liquidity requirement, which has been proposed in the United States but not yet adopted. In a recent blog post, BPI proposes a straightforward way the Fed could go about modifying the NSFR to correct its flaws and preserve its benefits.
5. TWO FIXES FOR CECL’S PROBLEMATIC CAPITAL IMPACT
Following up on previous BPI research, this blog reiterates that CECL could significantly increase the procyclicality of lending and exacerbate economic downturns. It urges banking regulators to act promptly to ensure that CECL is neutral with regard to regulatory capital under all economic conditions. To address capital treatment issues, the blog proposes two fixes:
An interim solution that would calculate a proxy for additional loan loss allowances required by CECL and then allow banks to exclude that portion of reserves from common equity Tier 1 capital; and A permanent solution that would require regulatory agencies to undertake a comprehensive recalibration of regulatory capital framework once they have more experience with CECL.
In Case You Missed It
Congressional Republicans are raising pressure on financial regulators for a “solution to help ward off a slowdown: rolling back regulations on the nation’s booming banks,” according to an article by Politico. “The lawmakers are hounding President Donald Trump’s appointees to step up their deregulation efforts to encourage more lending and keep the near-record expansion going, confident that they can withstand any blowback as memories of the 2008 financial crisis fade.”
On May 14, BITS, the technology policy division of the Bank Policy Institute, published the BITS Cloud Access Security Brokers (CASB) Use Case Matrix. CASBs are an emerging technology that assist financial services firms in managing cloud computing cyber risk to protect customer data and other sensitive assets. The BITS CASB Matrix tool offers a granular set of diagnostic questions to help firms match business requirements to service provider capabilities to ultimately mitigate enterprise risk across sanctioned and unsanctioned cloud applications.
On May 20, the Office of the Comptroller of the Currency (OCC) released its Semiannual Risk Perspective report, identifying credit, operational, compliance, and interest rate risks as key themes for the federal banking system. Of note, the report highlights potential risks associated with bank partnerships with fintech firms, and indicates that leveraged-loan exposure is not currently a top concern with a large proportion of such loans being transferred to nonbanks.
On May 22, the Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA) published its semi-annual Unified Agenda and Regulatory Plan, providing insight into the expected timing of a number of highly anticipated rulemakings (e.g., domestic and foreign bank tailoring final rules out in August 2019; NSFR final rule in September 2019; final FDIC Part 370 deposit insurance recordkeeping rule in July 2019). The full report can be found here.
5/24/2019 —Congress Will Break For Recess And Will Return On June 4
6/3/2019 —BPI President Greg Baer Keynotes Women In Housing And Finance Luncheon
6/6/2019 —SIFMA And BPI Host Prudential Regulation Conference
11/19/2019 – 11/21/2019 —The Clearing House + BPI 2019 Annual Conference