FOR IMMEDIATE RELEASE: July 17, 2018
CONTACT: Barbara Hagenbaugh, (202) 457-8783
WASHINGTON, D.C. – The Financial Services Forum supports the systematic review of U.S. capital rules to ensure our regulatory system balances the important goals of a safe and sound financial system with one that best supports economic growth and job creation.
“With nearly a decade of regulatory changes behind us, now is the time to conduct a holistic review of the post-crisis framework and to make adjustments that would foster greater efficiency and transparency and effectively balance the important goals of a safe and sound financial system with one that best supports economic growth and job creation,” Financial Services Forum President and CEO Kevin Fromer said on behalf of the Forum’s members, the eight largest and most diversified financial institutions headquartered in the United States. Fromer’s comments came in testimony to the House Financial Services Subcommittee on Financial Institutions and Consumer Credit.
“The ability of the Forum institutions to support the U.S. economy in their unique ways critically depends on calibrating regulation that balances effective costs and benefits,” Fromer said. “Financial regulations that do not balance costs with benefits lead to an inefficient financial system in which U.S. banks are hindered in their ability to best support consumers, businesses, the economy, and job creation.”
Forum President and CEO Kevin Fromer testifies on the review of capital regulations for financial institutions before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit.
The Forum’s member firms provide vital services in support of the U.S. economy. They support economic growth by lending to consumers, businesses, and other financial institutions, and help foster deep and liquid capital markets that allow government and private institutions to finance public spending and investment. In the first quarter of 2018, Forum institutions held more than $4 trillion in loans, accounting for 44 percent of total lending to businesses and households.
Forum institutions have significantly enhanced their resiliency and resolvability during the past decade and are strongly positioned to support economic growth throughout the economic cycle. Importantly, Forum members have substantially improved their capital and liquidity positions. Forum member institutions now maintain more than $900 billion in tier 1 capital, the most loss-absorbing form of capital, an increase of more than 40 percent since 2009.
Fromer discussed the need for a review of the post-crisis capital framework, recognizing that the large number of regulations implemented in the past decade were developed independently to address specific issues and achieve targeted goals. “At the same time, all of these regulations are interdependent and the imposition of one regulation has implications for others,” he said.
“In conducting this review, regulators must seriously consider how different post-crisis regulations interact with each other and whether the resulting regulatory system is appropriately calibrated to support the U.S. economy,” he said.
“The ability of the Forum institutions to support the U.S. economy in their unique ways critically depends on calibrating regulation that balances effective costs and benefits,” Fromer said.
More specifically, Fromer discussed the need to review the additional capital buffer that is applied to global systemically important banks, or GSIBs. The GSIB surcharge is scaled to the regulators’ estimates of a banks’ systemic importance, yet the surcharges have not been adjusted to account for improvements in liquidity, resolvability, and other related regulations that were finalized after the GSIB surcharge was finalized three years ago. Further, regulators implemented the surcharges for U.S. firms beyond the framework that was agreed to at the international level. As a result, the GSIB surcharge is substantially higher for the Forum’s members than their foreign competitors.
“This impinges upon the international competitiveness of our members and provides a further rationale for reviewing and reconsidering the appropriate calibration,” Fromer said.
Fromer also discussed the need for the Federal Reserve to undertake a broader review of its capital planning and stress testing programs to improve transparency and ensure that boards of directors at financial firms can clearly and appropriately make capital management decisions.
“A firm with capital in excess of the FRB’s requirements—inclusive of all relevant buffers—should be permitted to make capital distributions in the way its board deems is most productive,” he said. “The Federal Reserve’s current capital planning process reduces the ability of a firm to attract new capital and, in turn, artificially reduces the ability to provide credit to the economy.”
Fromer also encouraged regulators to take steps to ensure that leverage capital requirements act as a backstop to risk-based capital requirements, rather than as a binding constraint. In particular, he said the leverage calculations should exclude risk-free assets to eliminate the economic incentive to reduce participation in lower-risk, lower-return businesses.
The Financial Services Forum is an economic policy and advocacy organization whose members are the chief executive officers of the eight largest and most diversified financial institutions headquartered in the United States. Forum member institutions are a leading source of lending and investment in the United States and serve millions of consumers, businesses, investors, and communities throughout the country. The Forum promotes policies that support savings and investment, deep and liquid capital markets, a competitive global marketplace, and a sound financial system.