Washington, DC – July 12, 2016 – Jeremy Newell, General Counsel of The Clearing House Association (TCH), testified today before the House Financial Services Committee at a hearing focused on the tradeoffs in using a leverage ratio to assess capital adequacy as proposed in the discussion draft of the Financial CHOICE Act recently released by Chairman Hensarling. Mr. Newell’s testimony discussed how capital and other rules could be rationalized and tailored to better serve consumers, businesses, and economic growth while still ensuring the resilience and stability of our financial system.
“[The] numbers speak for themselves: the U.S. banking system does not need even more capital,” said Mr. Newell in his opening statement before the House Financial Services Committee. “And yet, there are pending or planned new regulations from U.S. and international regulators that would do just that – including a Basel IV project to rewrite, yet again, the capital framework, a planned increase in required post-stress capital under CCAR, and a new countercyclical capital buffer. All are ill advised. We should instead be considering the effect of existing rules on economic growth, and taking steps to better rationalize or tailor those that have high costs and minimal benefits.”
Mr. Newell split his testimony into four parts. He provided an overview of the benefits and costs of bank capital, outlined his support for core post-crisis reforms, highlighted concerns with regulations that impose meaningful impediments to economic growth and access to credit by consumers and smaller companies, and described several key consideration that should inform efforts to reevaluate and better rationalize existing capital requirements and post-crisis bank regulation more broadly.
In his oral testimony Mr. Newell detailed significant concerns with the U.S. supplementary leverage ratio to assess the capital adequacy.
“Although sometimes viewed as an alternative to risk-based capital, the leverage ratio is in fact also a risk-based measure of capital – albeit a very inaccurate one, said Mr. Newell. “It assesses the risk of holding every asset to be exactly the same – akin to setting the same speed limit for every road in the world, whether it’s a highway or a school zone. Although the risk-weights used in risk-based measures can sometimes be wrong about the risk of an asset, a leverage ratio is almost always wrong.”
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.