04/18/2024 | Press release | Distributed by Public on 04/18/2024 06:58
Remarks by Joseph Seidel, Chief Operating Officer for SIFMA, as prepared for delivery at SIFMA's Basel III Endgame Roundtable Part II
Thank you Ken, and thank you Governor Bowman. That was an excellent way to set the table for the rest of our roundtable discussion.
As Ken noted, the U.S. policymakers who proposed the Basel III Endgame package now acknowledge that they have more work to do and have stated that they plan to make material changes to the current proposal.
Why? Because it is overwhelmingly clear the proposal goes unnecessarily far and the negative consequences will be severe.
U.S. bank capital levels are already extraordinarily robust by historical standards and in terms of overall levels and quality of capital. These levels appropriately balance financial stability with economic growth.
The U.S. proposal would, however, dramatically hike capital requirements even further.
While this complex proposal will have significant effects across the economy, one of its lesser discussed components would potentially have the most far-reaching impacts, and that is what we will focus on today.
As SIFMA called out in our multiple comment letters submitted earlier this year, the proposed increases in capital specifically for banking organizations' capital markets activities under the Fundamental Review of the Trading Book (FRTB) and Credit Valuation Adjustment (CVA) are far greater than stated in the proposal and are not commensurate with the underlying risks.
In fact, the latest industry quantitative impact study estimates that capital for large banks' trading activities would increase by 129% over their current historically high levels, leading to negative effects on the ability of large banks to provide a range of capital markets services to their clients.
Given that the U.S. capital markets provide 75% of the financing for the real economy, and given the vital role large banks play in intermediating those markets, such dramatic capital increases will likely impair market liquidity and vibrancy.
This will result in serious knock-on effects for the real economy, impacting companies, consumers and savers who benefit directly or indirectly from bank involvement in U.S. capital markets, and further hurting U.S. economic growth.
Indeed, we are seeing this negative impact occurring already as many firms begin to price the expected changes into certain long-dated instruments and have, in other instances, indicated an intention to scale back specific business lines.
Regulators have not fully accounted for these capital market impacts because in our view they did not conduct the necessary, robust analysis in advance of issuing the proposal.
As I mentioned, regulators have said they plan to make changes. But what will those be? What aspects will be changed? The devil is in the details.
In reality, the most prudent path ahead would be for the agencies to withdraw the proposal & re-propose the entire rule for public comment.
Any re-proposal should contain a robust holistic review of the entire capital framework and an economic analysis demonstrating the benefits and costs of the proposed changes.
More specifically, SIFMA would recommend the following top ten changes be made to the rule:
These are items that are top of mind here at SIFMA and today's panels should give policymakers additional food for thought as they re-analyze their approach.
Turning then to our program today. First, we will ask our participants for their overall reflections on the Basel III Endgame proposal and evaluate its impacts on U.S. capital markets, end users, and the broader economy.
Then we will move to a deeper dive on the proposal's capital markets components, including the Fundamental Review of the Trading Book, Credit Valuation Adjustment, and the framework for haircuts on Securities Financing Transactions. We'll identify some of the challenges with these aspects of the proposal and potential solutions.
We will end with a discussion of the proposal's interactions with other components of the capital framework, particularly the supervisory stress tests, GSIB surcharge, and resolution-related capital requirements, as well as an evaluation of the road ahead for the proposal.
And now, let's get started. Please join me in welcoming Jelena McWilliams, Managing Partner of the Washington, D.C. office and Head of the Financial Institutions Group Practice at Cravath, Swaine & Moore. And as you all know, Jelena is also a former Chairman of the Federal Deposit Insurance Corporation.
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Joseph L. Seidel is Chief Operating Officer of SIFMA. He manages the day-to-day operations of the Association, including core legal, regulatory, business practices, public policy and communications activities.