Prudential regulation requires banking organizations to prudently measure and manage risks, maintain adequate capital and liquidity levels, and have in place workable recovery and resolution plans.

Our regulatory regime must account for the vital role the capital markets play in providing credit and financing the real economy, particularly as regulators consider the finalization of elements of the Basel III Endgame and the GSIB surcharge proposals. Those rules must be implemented in a manner that does not overly penalize banks’ capital markets activities, which in turn could reduce liquidity in vital corporate and other funding markets, thereby hurting growth in the real economy.

While bank capital requirements are an undoubtedly complex subject, there is no question that they have material impacts across the entire economy, affecting the ability of corporations, small businesses, governmental organizations, and consumers to fund their activities and manage all types of risks. Given these impacts, it’s crucial that policymakers conduct sufficient analysis and oversight to ensure that bank capital requirements strike the appropriate balance between ensuring financial stability and macroeconomic growth.

In this context, it is worth noting that the quantity of high-quality capital in the U.S. banking system has increased three-fold since the Global Financial Crisis, while total loss absorbing capacity has increased six-fold and liquidity levels have increased twelve-fold. Many independent studies have also found capital levels at the largest U.S. banks to either be at or close to their “optimal” levels. And senior policymakers, including Treasury Secretary Yellen, Federal Reserve Chair Powell, and Federal Reserve Vice Chair for Supervision Michael Barr, amongst others, have commented in recent years that the U.S. banking system is strong, resilient, and “well-capitalized.” In other words, capital levels are already robust and any further proposed increases should be sufficiently scrutinized to determine both the tangible benefits, and costs to the broader U.S. economy.

It is particularly important that policymakers strike the right balance when it comes to capital requirements affecting the ability of large banking organizations to act as intermediaries in our capital markets, given that those markets fund roughly three quarters of all economic activity in the United States. This is a critical reason that the U.S. economy is more efficient, resilient and growth oriented than other major economies, where the vast majority of commercial and economic activity is heavily reliant on direct lending by banks. In fact, the EU and many Asian nations aspire to develop their capital markets to mimic the U.S. model. Excessive capital requirements on banks’ markets activities would negatively impact the depth, liquidity and resiliency of the capital markets and increase costs at the expense of consumers and commercial entities who benefit directly and indirectly from bank involvement in such activities.

Reforming the Basel III Endgame Proposal

SIFMA has expressed deep concern about the Basel III Endgame proposal issued by the banking regulators, not only because it would significantly increase aggregate U.S. bank capital levels well beyond their current, historically robust levels, but because it inappropriately targets banking organizations’ capital markets activities for some of the largest increases. The industry quantitative impact study conducted on the original Basel III Endgame proposal estimated that capital for large banks’ trading activities would increase by 129% above their current historically high levels because of the Fundamental Review of the Trading Book (“FRTB”) and Credit Valuation Adjustment (“CVA”) changes, impacts that were far greater than the agencies’ original estimates, a consequence of the fact that they did not conduct a proper quantitative impact assessment prior to issuing the original proposal.

Key Recommendations

Our key recommendations include:

1. Addressing the overlaps with the stress tests and other capital requirements
2. Accounting for the interactions between the Global Market Shock (“GMS”) and the Fundamental Review of the Trading Book (FRTB)
3. Giving Greater Credit for Diversification
4. Facilitating banks’ ability to use internal models for market risk
5. Facilitating prudent risk management practices with derivatives
6. Removing the punitive treatment for securitizations
7. Removing the Securities Financing Transactions (SFT) haircut framework
8. Removing the public-listing requirement for investment grade counterparties and collateral
9. Revising the operational risk framework
10. Providing clarity around the implementation timeline, and granting at least 18 months from completion of the final rule

The Impact of US Bank Capital Requirements on Capital Markets: A Blog Series

Read SIFMA’s blog series on the Basel III Endgame reforms to explore the impact of U.S. bank capital requirements on the capital markets:

• Part 1: Current Regulatory Capital Requirements Applicable to US Banks
• Part 2: How Basel III “Endgame” Reforms Will Transform US Capital Requirements
• Part 3: Identifying an Optimal Level of Capital and Evaluating the Impact of Higher Bank Capital Requirements on US Capital Markets
• Part 4: Explaining the Overlap Between the FRTB and the Global Market Shock
• Part 5: The Basel III Endgame’s Potential Impacts on Commercial End Users
• Part 6: Understanding the Proposed Changes to the US Capital Framework
• Part 7: The Federal Reserve Should Revise the US GSIB Surcharge Methodology to Reflect Real Risks and Support the Economy
• Part 8: A Rejoinder on the Need for Trading Book Capital Increases
• Part 9: The Federal Reserve Should Remove Gold-Plating in the Basel 3 Endgame 
• Part 10: How the Basel III Endgame Could Impair Securitization Markets and Harm US Businesses and Consumers
• Part 11: Revisiting US Treasury Market Capacity and Resiliency: Part I – The Impact of Rising Debt Levels and Constrained Dealer Capacity on Market Resiliency
• Part 12: Revisiting US Treasury Market Capacity and Resiliency: Part II – Evaluating the Likely Impact of the Basel III Endgame and Other Recent Regulatory Proposals on the Treasury Markets
• Part 13: Why the Federal Reserve Should Pay Particular Attention to Banks’ Capital Markets Activities When Deliberating Revisions to the Basel III Endgame Proposal
• Part 14: How the US GSIB Surcharge and Basel III Endgame Proposals Would Adversely Impact ETF Markets
• Part 15: Our Take on PwC’s Assessment of the US Basel III Endgame Proposal

Featured Videos

• 3 Questions About the Basel III Endgame Proposals
• US Treasury Market Explainer Shorts

Additional Reforms to the Stress Testing Process

SIFMA has long highlighted the importance of reforming the stress testing process more generally to not only remove overlaps with the risk-based capital standards, but to ensure that the GMS component is based on “severe but plausible” market shocks. Developing more plausible scenarios and providing the public with an opportunity to provide input into their development would help to reduce excessive year-over-year volatility in firms’ Stress Capital Buffer (“SCB”) requirements, ensure calibration is tied to the underlying risks, and add transparency to what is currently an opaque process.

GSIB Surcharge and Long-Term Debt Proposals

Banking regulators must consider the important interactions between the Basel III Endgame and two other outstanding capital proposals: the GSIB surcharge and long-term debt requirements. Regarding the GSIB surcharge, additional changes to the latest proposal are needed, including a reweighting of the short-term wholesale funding indicator in calculating GSIB scores. Regarding the long-term debt proposal, we have been deeply concerned that the proposal as written would drive up the supply of long-term debt while simultaneously constraining investor demand, increasing bank funding costs and reducing liquidity in these markets, with knock-on consequences for businesses and consumers. We have made a series of recommendations for reform of the proposal that would reduce these negative impacts and ensure the final rule is more appropriately calibrated.

Brokered Deposits

SIFMA remains concerned about the FDIC’s recent proposal to revise the regulations surrounding brokered deposits, which would make it more difficult and costly for broker-dealers to provide sweep accounts to their customers. Sweep accounts are an important component to retail financial advisory services for tens of millions of individual investors and provide a stable source of funding to banking organizations and deliver risk-free returns to millions of Americans. SIFMA has called on the FDIC to withdraw and reconsider this proposal in light of procedural issues. Absent that, we will be making a series of recommendations that we believe would reduce the negative impacts of the proposal on broker-dealers and their retail clients.

Tailoring of Rules for Internationally Headquartered Banks and Smaller Banking Institutions

SIFMA strongly supports the tailoring of prudential regulations to ensure that they are aligned with the size and risk profile of banking institutions. Internationally headquartered banks that are already subject to robust home country capital, liquidity, and resolution requirements should be subject to tailored requirements for their U.S. operations that appropriately reflect their size and risk profiles, and allow them to continue to play a critical role in supporting the U.S. capital markets and U.S. economic growth. Such tailoring would also be consistent with the requirements set forth in the Economic Growth, Regulatory Relief, and Consumer Protection Act, which President Trump signed into law in May 2018.

For the same reasons, we also strongly support tailoring of prudential requirements for smaller domestic banking institutions, particularly those whose primary business model involves low-risk retail broker-dealer activities.