On July 17th, I had the honor to testify before the U.S. House Financial Services Subcommittee on Financial Institutions and Consumer Credit. My testimony focused on the need for 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.
The improvements to the safety of the largest, most diversified U.S. banks cannot be overstated. Tier-one capital has increased to more than $920 billion, up 40 percent since 2009. Liquidity is up 85 percent since 2010. Structural and supervisory reforms have made the largest U.S. banks safer than they have ever been.
Nearly 10 years since the financial crisis, regulators—both here and abroad—rightfully believe now is the time to ensure all the post-crisis rules, especially new capital regimes, are working as intended. We should not wait to ensure our capital regime is efficient, effective, and does not hinder banks’ abilities to serve customers and support the economy.
The Case for Recalibrating GSIB Surcharge Requirements in 30 Seconds
Let’s break this down.
1. First of all, if you feel like, if you believe that the system has improved through a variety of different improvements—whether it’s TLAC, or clearing margin, or living wills—you should go back and look at the GSIB surcharge.”
As our Director of Policy Research, Sean Campbell, detailed in a recent joint blog post, global systemically important banks, or GSIBs, must meet an extra capital requirement known as the GSIB surcharge, which was first set in 2015. But since then, we’ve undergone a number of changes that both reduce the likelihood of failure and the impact of a bank failure. If applied to the original calculation, these enhancements would reduce the surcharge by at least 1 percentage point, freeing up about $65 billion in capital that supports additional lending in the economy.
2. And then specifically you need to look at method 2 because of the built-in disadvantages it provides for the U.S. GSIBs versus their foreign peers.”
The GSIB surcharge is substantially higher in the U.S. than in other countries, making it more expensive for our banks to supply credit to customers. With this constraint, our banks are less competitive on the international stage.
3. And it’s amplified, as I think you are getting to, by the fact that the GSIB surcharge has now been imported into two other schemes, one of which is the supplementary leverage ratio for the largest banks, and the second is the stress capital buffer proposal.”
There are proposals to import the GSIB surcharge calculation into two other capital rules. That makes it even more imperative that regulators review the surcharge now to ensure it is appropriately set.
The Practical Challenge of Stress Tests
Here is the challenge faced by banks. Management is presented with economic scenarios in February. The government makes a decision in June regarding bank capital distributions, a decision that is made with little transparency, and the results apply throughout the year. For businesses, a lot can happen in a year, and our banks have to live with constraints—even after meeting all capital requirements—no matter what happens. As I put it in testimony:
“The process right now is very constraining. And in effect, it says, even though you’ve met your minimum requirements, even though your institution is safe and sound, you’ve got all your minimum requirements in place, you as a board, you as a management, are still restricted in terms of the way you can deploy and distribute your capital. That’s sort of an erosion of fiduciary responsibility that we think needs to be addressed as part of the overall review.”
This challenge is not just one felt by the banks because ultimately, it impacts the banks’ customers: American families, small businesses, and multinational clients. As I stated in testimony:
“If you’ve gone through a thoughtful planning process—as our institutions all do—and you’re constrained by information that you do not have because you just don’t have access to it…So to the degree that you can’t make decisions about the operation of your institution, it inevitably affects the kinds of services you’re going to provide to your customers and the pricing as well.”
Recalibration Is Not Turning the Clock Back; It’s Getting It Right
My concluding remarks at the hearing reiterated this point:
“We’ve done an enormous amount of work to address the results of the crisis. These are extremely highly capitalized institutions, as we’ve talked about. No one really wants to go back and turn the clock on that. We’re not looking at going back to the future, if you will. But we do think it’s important to take stock of what we’ve done and make sure that we’re doing it in the most cost-effective way possible.”