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Sean Campbell

Chief Economist, Head of Policy Research

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Michael Chasen

Research Associate, Policy Research

<h3>Introduction</h3>In a&nbsp;<a href="https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=408768">hearing</a>&nbsp;on Tuesday focused on recent failures of regional banks, banking regulators repeated their&nbsp;<a href="https://financialservicesforum.cmail20.com/t/r-i-ttjiduky-l-t/">intention</a>&nbsp;to propose new capital rules for banks who have been a source of strength in recent months, the U.S.-based Global Systemically Important Banks, or GSIBs.&nbsp;These new requirements are expected to significantly increase capital requirements for these banks.A new report, <a href="https://www.pwc.com/us/en/industries/financial-services/library/basel-iii-endgame.html#:~:text=Basel%20III%20Endgame%20is%20a,%2Dweighted%20assets%20(RWA)">Basel III Endgame: The next generation of capital requirements</a>, sheds important light on the state of large bank capital in the United States.&nbsp; The findings from PwC, the global audit and consulting firm, are helpful for assessing both the current state of capital at the largest U.S. banks and any potential need for additional capital.&nbsp; In this blog, we provide a brief overview of the PwC report and its key findings.&nbsp; Overall, the report shows that 1) capital and resiliency at the largest U.S. banks is strong, 2) the level of capital maintained by the largest U.S. banks is in line with academic findings on the optimal level of bank capital, 3) increasing capital requirements on this group of banks will impose a direct cost on the economy, and 4) raising bank capital requirements will hasten the migration of activity from the banking sector to the less regulated non-bank sector and impair financial stability.&nbsp; The report and its findings should be seriously reviewed and considered by policymakers as they consider new capital rules for the nation’s largest banks.&nbsp; On balance, the report strongly suggests that any new capital requirements would incur more costs than benefits to the economy.<h3>The Largest U.S. Banks are Well Capitalized and Resilient</h3>Since the financial crisis, U.S.-based Global Systemically Important Banks (GSIBs), have increased their capital levels substantially. As the report shows in the chart below, common equity tier 1 capital (CET1), the highest quality of regulatory capital, has more than tripled to $881 billion.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2023-05-16-at-4.08.42-pm.png"><figcaption>Source: Basel III Endgame: The next generation of capital requirements</figcaption></figure>&nbsp;And while the report clearly documents the significant and notable rise in capital at the largest U.S. banks, it also outlines the substantial improvements in resiliency through other, non capital-related initiatives, such as liquidity requirements, total loss absorbing capacity (TLAC) requirements, and a host of other important regulatory initiatives.&nbsp; Importantly, the authors note that understanding and accounting for these additional sources of resiliency are crucial when evaluating the “right” level of capital for the banking system because these other initiatives support and complement capital requirements.&nbsp; As an example, the chart below from PwC clearly demonstrates the large increase in liquidity resources from roughly $500 billion to nearly $3 trillion– or more than a six-fold increase – that supports and buttresses capital requirements.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2023-05-16-at-4.08.57-pm.png"><figcaption>Source: Basel III Endgame: The next generation of capital requirements</figcaption></figure>&nbsp;&nbsp;<h3>Capital at the Largest Banks Consistent with Academic Research on “Optimal” Levels</h3>The new report also offers an important review of academic studies on the optimal level of capital in the banking system.&nbsp; This is an important part of the report because while documenting the significant increase in capital and resiliency is important, ultimately, we need a coherent analytical framework to assess “how much is enough?”The report reviews a broad range of relatively recent academic research on this topic.&nbsp; And importantly, the report reviews academic studies that consider a “broad range” of post-crisis regulations (e.g., TLAC, liquidity requirements) because of the inherent importance of considering the entire regulatory framework when assessing the optimal level of bank capital.&nbsp; The chart below summarizes the findings.&nbsp;&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2023-05-16-at-4.09.11-pm.png"><figcaption>Source: Basel III Endgame: The next generation of capital requirements</figcaption></figure>&nbsp;As shown in the chart and stated in the report, “the average optimal capital level that the papers suggest is near current levels at firms expected to be subject to Basel III Endgame capital requirements.”&nbsp; Moreover, it is worth noting that the average optimal capital level is “pushed up” by the results of a study from the Federal Reserve, which finds an optimal ratio of 20 percent, substantially higher than the findings of all other academic studies considered in the report.&nbsp; Accordingly, statements that large bank capital levels are inconsistent with the findings of academic research are simply incorrect.<h3>Increasing Capital at the Largest U.S. Banks will Impose Direct Costs on the Economy, Hasten the Migration of Activity to Non-Banks, and Impair Financial Stability</h3>In addition to documenting the resilience and capital adequacy of the largest U.S. banks, the report also provides important evidence on the impact of increasing capital standards on these institutions.&nbsp; Specifically, the report recognizes two key drawbacks to inappropriately high capital requirements: 1) higher borrowing costs for businesses and consumers, and 2) increased migration of banking activities outside the banking sector.In terms of the direct costs of increasing capital, the report points to a range of research, finding, “greater capital requirements increase a commercial bank’s funding costs, which increases its lending rates and reduces its loan volumes,” thus reducing economic activity.&nbsp; As an example, one of the papers reviewed in the report finds that increasing the risk-based capital ratio by two percentage points (e.g., increasing the requirement from 10 percent to 12 percent) would increase the cost of borrowing by roughly a quarter percentage point and reduce GDP by roughly a quarter percentage point.The report also considers the impact on the economy via a migration of activity outside the banking sector.&nbsp; More specifically, the report finds that non-banks may expand as a result of higher bank capital requirements pushing activity outside of the banking sector and may increase the chances of financial crises, “The potential increase in probability of a crisis would be driven by greater leverage in less regulated and less transparent financial intermediaries, and the potential increase in cost would be due to resiliency of the credit supply being reduced.” &nbsp;&nbsp;<h3>Conclusion</h3>PwC’s report on the largest U.S. banks provides a lot of important food for thought for regulators as they consider proposing higher capital requirements for the largest U.S. banks.&nbsp; Overall, the report finds that resiliency at the largest banks has been strengthened considerably and is at levels broadly consistent with recommendations offered by independent research studies.&nbsp; The report also rightly points to the costs of inappropriately increasing capital requirements – both in terms of the direct costs and the financial stability costs of an expanded non-bank sector.&nbsp; The Federal Reserve is conducting a “holistic review” of bank capital.&nbsp; The PwC report serves as an excellent template for such a review.&nbsp; The report is data-based, draws on a broad array of academic research, and, importantly, is fully public and transparent.&nbsp; The data, methods, and analysis contained in the report and its conclusions can be reviewed by anyone.&nbsp; We believe that the Federal Reserve should make its holistic review as open and transparent as the PwC report.&nbsp; Based on the findings, there is no convincing evidence to suggest that the largest U.S. banks are in need of more capital and increasing requirements would come at a cost.&nbsp; If the Federal Reserve holds a different view, it should be willing to provide its findings in a clear, open, and transparent manner before moving ahead with any policy prescriptions.&nbsp;&nbsp;&nbsp;&nbsp;

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We advocate for sound policies that recognize the importance of ensuring that banks are able to support the economy, compete internationally, and remain strong. In particular, the Forum supports a review of the GSIB surcharge, a capital requirement that was agreed to internationally, but that U.S. regulators have implemented in a manner that places higher requirements on U.S. banks than that required of foreign competitors. 

The Forum has also weighed in on an international assessment of post-crisis reforms and the clear need to differentiate between jurisdictions and to acknowledge the progress made in the United States.


Capital and Financial Stability

A Holistic Review of Large Bank Capital: Findings from a New Report

Large U.S. banks are subject to stricter capital requirements and maintain more equity capital on their balance sheet than their European competitors. Over time, internationally agreed-upon capital rules have been implemented more stringently in the United States than in Europe. As a result, and quite perversely, international efforts to create a level playing field have resulted in an unlevel one.&nbsp;Regulators around the globe are now engaged in implementing another round of internationally agreed-upon capital reforms, known as Basel 3 Finalization. And once again, there are clear signs that U.S. regulators will implement these reforms more stringently than other regulators, further widening the capital disparity between large U.S. and European banks. In this post, we document the existing capital disparity between large U.S. and European banks and then discuss the implications for further regulatory tightening by U.S. regulators. Unnecessarily tighter capital regulation in the U.S. will increase the cost of lending by U.S. banks while diminishing their ability to compete with their foreign competitors.&nbsp;&nbsp;&nbsp;<h3>A Comparison of U.S. and European Large Bank Risk-Based Capital Requirements</h3>Large, internationally active banks are all subject to capital requirements that are informed by internationally negotiated standards and are set forth by the Basel Committee on Banking Supervision.&nbsp; Capital is a critical resource for banks, ensuring that they can absorb losses associated with lending, other services, and changes in the economy. But capital is an expensive form of bank funding. The Basel committee was formed in 1975 for the purpose of creating bank regulatory standards that are consistent across member jurisdictions. Once standards are adopted by Basel, each country codifies those standards into regulation at the national level.Figure 1 below compares the weighted average risk-based capital requirement – in percentage terms – that applies to the eight members of the Financial Services Forum as well as 12 large banks headquartered in Europe – the UK (3), Switzerland (1), and the European Union (8). Each of these institutions is designated as a Global Systemically Important Bank (GSIB). The figure displays the overall level of required capital as well as the constituent components.&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2023-05-03-at-7.37.47-pm.png"><figcaption>Source: Federal Reserve Y-9C, Company Annual Reports</figcaption></figure>&nbsp;As shown in the figure, large U.S. banks are subject to a risk-based capital requirement of 11.3 percent versus a requirement of 9.9 percent for large European banks. As Basel capital regulation is intended to create equal standards across jurisdictions, one is led to ask – why are capital standards so much higher in the U.S.?U.S. capital requirements are higher in the U.S. primarily for two reasons.&nbsp; First, the eight U.S. GSIBs are subject to a higher GSIB surcharge – an additional capital charge for GSIBs – than those in Europe, because the Federal Reserve applied a surcharge that is tougher than the Basel GSIB standard. In the left-hand bar chart, we show that the higher GSIB surcharge (Additional U.S. GSIB) results in an additional 1.0 percent requirement. Second, large U.S. banks are subject to the Federal Reserve’s stress tests, which are then translated into a bank-specific stress capital buffer (SCB). Large U.S. banks are subject to an average SCB of 4.1 percent. Prior to the adoption of the SCB by the Federal Reserve, large U.S. banks were subject to a 2.5 percent capital conservation buffer (CCB) that is prescribed by Basel and applied also to large European banks. As a result, the SCB results in an additional requirement of 1.6 percent (Additional SCB) that does not apply to European banks.&nbsp;It should be noted that large European banks are subject to an additional set of Pillar 2 capital requirements that are not applied to U.S. banks. Still, the punitive nature of both the U.S. GSIB surcharge and SCB result in required capital for large U.S. banks that is 1.4 percentage points higher than that required of large European banks. In dollar terms, U.S. GSIBs are required to hold $100 billion more capital than their European competitors due to these more stringent requirements.<h3>A Comparison of U.S. and European Large Bank Equity Capital Levels</h3>An analysis of U.S. and European capital standards is informative, but how do these different capital standards translate into the amount of equity capital maintained by large U.S. and European banks?&nbsp; After all, banks typically maintain equity capital beyond their regulatory requirements to have a prudent cushion, and they consider a host of other factors, such as market conditions and the state of the economic cycle, in determining how much equity capital to maintain on their balance sheets.Figure 2 displays the ratio of equity capital (Total Assets – Total Liabilities) to total assets for large U.S and European banks. These ratios account for well-known, but technical differences in how U.S. and European banks report their total assets. Also, these ratios are based on total asset measurements that do not account for risk. As a result, these ratios cannot be directly compared to the risk-based requirements described above, but are informative for assessing the overall amount of equity maintained by each group of banks.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2023-05-03-at-7.38.00-pm.png"><figcaption>Source: Federal Reserve Y-9C, Company Annual Reports</figcaption></figure>&nbsp;As shown in the figure, U.S. GSIBs maintain 8.1 percent of total assets in equity capital as opposed to 5.7 percent for large European GSIBs. This clearly demonstrates that the higher requirements set by U.S. regulators directly translate into higher amounts of equity capital maintained by large U.S. banks.&nbsp;<h3>The Further Tilting of the Unlevel Playing Field</h3>As we have documented, large U.S. banks are subject to more stringent capital requirements and maintain more equity capital on their balance sheets than large European banks. This disparity directly contributes to competitive inequity because banks with lower capital requirements can fund their lending cheaper and undercut banks subject to more stringent requirements.The central aim of Basel III Finalization was to increase the quality and quantity of European bank capital to improve the competitive landscape. However, the European Union is proposing to implement these reforms in a manner that deviates from the Basel standards. More specifically, the <a href="https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Reports/2022/Basel%20III%20monitoring%20report/1039929/Annex%20-%20EU%20specific%20analysis.pdf">European Banking Authority</a> estimates that the EU approach will result in 3.2 percentage points less capital than would be achieved if the reforms were implemented in line with the Basel agreement.&nbsp;If the U.S. implements Basel III Finalization in a way that is more stringent than that adopted by the EU, the competitive inequities will be worsened, and there will be significant and unnecessary costs to the U.S. economy. In particular, the cost of bank lending by U.S. banks will rise while eroding their ability to compete with their foreign competitors. U.S. regulators can implement the standards in a way that avoids these results. And given the obvious strength and resilience of the largest U.S. banks, it has every reason to do. &nbsp;

U.S. vs. European Capital Adequacy - The Increasingly Unlevel Playing Field Unfolding in Basel III Finalization

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Kevin Fromer

President and Chief Executive Officer

The rapid and disorderly failures of Silicon Valley, Signature, and Silvergate banks last month quickly unleashed calls for more bank regulation, before there was time to even begin an assessment of what had taken place. Hopefully, informed policymakers will let careful review of the facts and issues be the basis for any targeted recommendations that the public can consider and debate.&nbsp;During this period, the strength of the largest U.S. banks – which are subject to the most stringent regulation and supervision – has never been in doubt. In fact, as they did during the pandemic, the nation’s largest banks have acted as a source of strength and supported the broader banking sector to avoid further turmoil and cost to the economy.Recent bank failures have been characterized by a classic “bank run” dynamic in which a lack of liquidity was the key source of vulnerability. In the case of Silicon Valley Bank (SVB), the first line of defense was the management itself, followed by supervisory oversight, to ensure that as the bank grew rapidly, its management had the information and judgment to manage its unique deposit profile and customer base, it had adequate liquidity, and eventually, access to capital.Only thorough reviews by authorities, independent arms like the GAO, and oversight committees of Congress will help reveal if additional requirements might have prevented these bank runs. A clear focus will be on liquidity risk – or the need to manage the duration and liquidity profile of a bank’s assets and liabilities – which is the most fundamental risk in banking. Such risk is addressed by a set of requirements that are designed to regulate and inform bank management’s assessment of its ability to meet its liquidity needs. But liquidity risk is wholly unrelated to the risk that is targeted by capital regulation – credit risk. The largest U.S. banks meet the most stringent liquidity and capital requirements. They are also subject to the strictest and most stringent supervisory program on an ongoing basis.Even though the collapse of SVB and Signature Bank had nothing to do with the existing capital regime for large banks, there are some who simply respond by saying that more capital solves any problem. However, the capital standards that apply to the largest U.S. banks never applied to these or similarly sized banks. Notably, when the Biden administration called for changes to the bank regulatory regime, none was suggested for the largest banks.Despite this, U.S. regulators are considering changes to large bank regulation, including the final elements of the Basel capital reforms, on top of an already robust capital framework to which the largest U.S. banks fully adhere. Final Basel reforms were first contemplated before our nation’s largest banks had been tested through a real-life stress test of the pandemic, and more recently, a period of significant uncertainty in the banking sector. Throughout it all, the nation’s largest banks have been a source of strength and proven their resilience. Consequently, the onus should be on regulators to prove an increase in capital is necessary or wise for the largest U.S. banks, given the inevitable negative impact on the costs of lending and the real economy, and the continued migration of risk to the less regulated non-bank sector. Over the next several months, making the right choices for borrowers, savers and the economy will be critical.&nbsp;<blockquote>The Difference Between Capital and LiquidityImportantly, requirements for liquidity and capital are distinct. Liquidity is the cash and other assets banks have available to quickly meet short-term business and financial obligations. Capital encompasses the resources banks maintain to absorb losses in times of stress and continue to serve customers, clients, and communities. <a href="https://www.federalreserve.gov/faqs/cat_21427.htm">Learn more</a>.</blockquote>&nbsp;&nbsp;

Large Bank Capital Requirements and Recent Bank Failures – Why One Has Nothing to Do with the Other

<h3>Introduction</h3>During the pandemic, Financial Services Forum members displayed significant strength and provided support to the economy by providing much-needed lending to businesses and households, helping firms raise capital through public securities offerings, and providing consumers with a place to keep their money safe during a period of heightened uncertainty. &nbsp;In looking back at the pandemic, some have argued that given broad government support for the economy, COVID was not a true test of the banking system’s resiliency.&nbsp; In this post, we analyze the impact that counterfactually high COVID losses absent government intervention would have had on Forum members.&nbsp; The analysis shows that even in the face of counterfactually high hypothetical losses Forum capital levels would have remained robust, allowing them to support the economy during the pandemic.&nbsp; &nbsp;<h3>The Calm Before the Storm: Large Bank Capital on the Eve of the Pandemic</h3>On the eve of the COVID pandemic, the fourth quarter of 2019, Financial Services Forum members maintained an aggregate common equity Tier 1 capital ratio of 12.1 percent.&nbsp; Before discussing the events of the pandemic, it is instructive to assess the significance and robustness of that level of capital.&nbsp; In particular, Forum capital levels reflected a 4.5 percent minimum requirement that was established after the financial crisis as well as a variety of capital buffers relating to the Federal Reserve’s stress tests and other regulatory requirements, such as the GSIB capital surcharge, that are intended to ensure that Forum members maintain capital well beyond the amount needed to operate during both normal and stressed economic conditions.&nbsp; These capital buffers are intended to flexibly expand and contract in response to underlying economic conditions and are not rigid requirements that are fixed for all time.&nbsp;&nbsp;&nbsp; &nbsp;In Figure 1, we display the required regulatory minimum and pre-COVID capital levels to visually demonstrate the strong and robust level of capital maintained by Forum members before the onset of the pandemic.&nbsp; The figure clearly demonstrates that Forum members were well positioned to support the economy despite the unanticipated economic turmoil stemming from the pandemic.&nbsp; &nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2023-02-22-at-3.44.44-pm.png"><figcaption>Source: Federal Reserve Y-9C</figcaption></figure>&nbsp;<h3>Large Bank Capital and Counterfactually High COVID Losses</h3>As COVID shut down the U.S. economy in the first quarter of 2020, banks suffered losses and their balance sheets expanded as they absorbed deposits and extended credit to support the economy.&nbsp; As a result, bank capital ratios declined from 12.1% to 11.4% - the low point of Forum member capital during the pandemic.&nbsp; While this decline represents an economic loss, large banks exhibited double digit capital levels, reaffirming their resiliency.&nbsp; Indeed, the reduction in capital simply reflected a modest compression of the ample capital buffers that were established after the financial crisis.Some have argued that these losses do not represent the “true” economic losses attributable to the pandemic because of government support.&nbsp; While banks received no direct government support during the pandemic, some have argued that broad support provided throughout the economy – extended unemployment benefits, CARES act stimulus, and the like – buoyed household finances and forestalled loan defaults that would have otherwise hit the banking sector.In order to seriously consider these claims, one needs to provide a specific and quantitative estimate of those counterfactual losses.&nbsp; Such counterfactuals are, by their very nature, hard to assess.&nbsp; How can anyone validate a loss estimate that never occurred based on assumptions that were not realized?&nbsp; Conceptual difficulties aside, it is instructive to consider some estimates of counterfactual losses to see what impact they would have had on large bank capital levels.One analysis conducted by the <a href="https://www.minneapolisfed.org/article/2021/government-fiscal-support-protected-banks-from-huge-losses-during-the-covid-19-crisis">Federal Reserve Bank of Minneapolis</a> suggests that banking industry losses would have been $100 billion to $300 billion higher in the absence of government support.&nbsp; Our use of these estimates is intended to be instructive but is not intended to convey agreement with the findings.In Figure 2 below, we show the aggregate Forum member capital ratio that would have been realized had these counterfactual losses – either $100 billion or $300 billion scaled to reflect the size of Forum members relative to the entire industry – occurred in the first quarter of 2020.&nbsp; This calculation is highly conservative because we are assuming that all of the losses would have been realized in a single quarter, and we are also assuming that the losses would have occurred when Forum member capital was at its lowest point during the pandemic (Q1 of 2020).&nbsp; Had those counterfactual losses occurred more smoothly over the course of 2020, the impact on capital would be significantly smaller.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2023-02-22-at-3.45.00-pm.png"><figcaption>Source: Federal Reserve Y-9C, Federal Reserve Bank of Minneapolis</figcaption></figure>&nbsp;&nbsp;As shown in Figure 2, these counterfactual losses would have reduced Forum member aggregate capital from 11.4% to between 10.7% ($100 billion) and 9.2% ($300 billion).&nbsp; This level of capital is still quite robust, being more than twice the post-crisis regulatory minimum of 4.5%.&nbsp; It is reasonable to assume that banks need to maintain capital above the regulatory minimum requirement.&nbsp; It is clear, however, that operating with a level of capital that is more than twice the post-crisis regulatory minimum would be sufficient to continue operating soundly while maintaining public confidence.&nbsp; While higher COVID economic losses would have resulted in lower capital levels, and may have required some amount of capital to be rebuilt over time, the resulting counterfactual capital levels are not anywhere near a level that could be reasonably described as problematic or distressed.This point has also been publicly made by Federal Reserve Chair Jerome Powell.&nbsp; Specifically, during a <a href="https://www.youtube.com/live/-46kqEn6JLc?feature=share&amp;t=4616">Senate hearing in 2021</a>, Chair Powell disputed an assertion that banks would have been materially weakened by an additional $300 billion in COVID losses.&nbsp; Chair Powell responded: “which they would have met.&nbsp; Which they would have been able to absorb without difficulty.” (emphasis added)<h3>Addressing the Cassandras – Root Risk Analysis in Reality&nbsp; &nbsp;&nbsp;</h3>The analysis above and the statements of Chair Powell clearly document that Forum members would have remained resilient during the pandemic even if bank losses were unrealistically elevated relative to actual experience.&nbsp; But what if losses were $600 billion or $900 billion or even $1 trillion?&nbsp; What if the elevated losses carried into 2021, and 2022, and 2023 as well?&nbsp; What if the virus had become significantly more virulent and resulted in multiyear and economically devastating lockdowns?As a matter of basic arithmetic, it is always possible to dream up an implausibly extreme, counterfactual scenario that would substantially weaken bank capital to unstable levels.&nbsp; But that exercise tests nothing except one’s ability to count.&nbsp; Rigorous and informative risk analysis demands that the scenario be within the bounds of reason given the prevailing economic context.&nbsp; Counterfactually high pandemic losses would have reduced capital levels, but capital would have remained sufficiently strong to avoid any significant financial distress.&nbsp; Of course, one should “never say never” when it comes to risk.&nbsp; But simply asserting that losses could have reached a level that would have destabilized the banking system is a tautology with no empirical content that says nothing about the safety and soundness of large banks.&nbsp;&nbsp;&nbsp;<h3>Conclusion</h3>Forum members steadfastly supported the economy during the depths of the COVID pandemic.&nbsp; Their ability to support our economy stems from their strong capital position.&nbsp; No large banks received direct government assistance during the pandemic.&nbsp; An analysis of counterfactually high COVID losses clearly shows that Forum members would have maintained sufficient capital to continue supporting the economy. &nbsp;&nbsp;

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Small businesses are vital to the growth and prosperity of our country. The Forum supported an extension of the Paycheck Protection Program, which provides forgivable loans to small businesses, so that all small businesses would have access to the support in 2021. 

In addition, we endorse policies that ensure the largest banks can best support the economy and market functioning during these difficult times.  The Forum in particular has backed policies that incentivize liquidity in markets and prevent unintended consequences to consumers and small businesses. 


Economic Support

Large Bank Resiliency During an Economic Crisis - the COVID Stress Test  

<h3>Introduction</h3>Large banks contribute to our economy in a variety of ways.&nbsp; Importantly, breadth and scale make it possible for large banks to extend their reach and help consumers, communities and business throughout the country while also driving efficiencies that reduce costs for the whole economy.&nbsp; In this post, we briefly outline some of the ways in which large banks provide significant benefits to the economy.<h3>Matching Savings with Investment All Across the USA</h3>One key benefit of large banks is that they operate on a national scale, which provides them with the opportunity to benefit consumers, communities and businesses across our economy.&nbsp; One tangible example of the wide reach of large banks is their small business lending activities.&nbsp; The chart below shows small business loans that were originated by Financial Services Forum members in the continental United States in 2021 (Forum members also originate small business loans in Alaska, Hawaii and U.S. territories, but these are not displayed to conserve space).&nbsp; As shown in the chart, Forum members are working with small businesses in every part of our country.&nbsp;&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2023-02-15-at-9.23.04-am.png"><figcaption>Source: FFIEC Community Reinvestment Act and Census Data for 2021</figcaption></figure>&nbsp;The breadth of small business lending by Forum members displayed in the chart is important because it speaks to a primary function of the banking system: connecting savers and borrowers.&nbsp; The central goal of banking is to match savers with excess savings with borrowers who have productive investment opportunities and need funding.&nbsp; This basic matching function between savers and borrowers is the primary role fulfilled by banks in our economy.&nbsp; A key advantage of large banks is that they have a geographically diverse reach that allows them to find good matches between savers and borrowers even if they aren’t nearby.&nbsp;As an example, a local area in California may have a sharp need for investment because of the emergence of a thriving new industry.&nbsp; At the same time, that specific area may not have significant amount of excess savings among its households to finance the needed new investments.&nbsp; A large bank, however, can source that financing from deposits sourced from New England, or the South, or the Midwest. By leveraging their scale, large banks can connect those that have the greatest need for investment dollars with those households that have the greatest abundance of savings to invest.&nbsp; And as shown above, Forum members productively match small business borrowers with savers all across the country to finance the important needs of small businesses. &nbsp;<h3>Driving Efficiencies to Reduce Economywide Costs&nbsp;</h3>Another key benefit of large banks is their well-documented ability to reduce costs.&nbsp; A raft of empirical research convincingly shows that large banks benefit from scale economies.&nbsp; Specifically, a large bank can produce the same amount of banking services, such as lending, at lower cost than a smaller bank.&nbsp; One reason for these scale economies is that a large bank can spread its fixed overhead costs out over a larger number of customers, thereby reducing total costs.&nbsp; As a simplified example, imagine that every bank needs a building to serve as its headquarters.&nbsp; A small bank with 100 customers would need to amortize that cost over 100 customers while a large bank could amortize the same cost over several thousand customers, thereby reducing the total cost of producing banking services.Several academic researchers have quantified the scale economies in the banking industry.&nbsp; In the chart below we use this <a href="https://www.newyorkfed.org/medialibrary/media/research/epr/2014/1412kovn.pdf">research</a> to compare the operating costs of Forum members – the cost of wages, IT, real estate, legal services, and so on - with the cost that would be expected to result if each Forum member was replaced by a large number of small banks with total assets of $10 billion, such that the total assets of all the small banks equated to the total assets of Forum members.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2023-02-15-at-9.23.29-am.png"><figcaption>Source: 2022Q3 FR Y9-C Data, Federal Reserve Bank of New York</figcaption></figure>&nbsp;As shown in the chart above, replacing Forum members with a large number of small banks would result in a significant increase in costs.&nbsp; The increase in costs results directly from the empirically documented scale economies that accrue to large banks such as Forum members, but not to smaller banks.&nbsp; Overall, the research suggests that banking costs would increase by roughly 25 percent if large banks were replaced by an equivalent number of small banks.&nbsp; These increased costs would be borne by the economy.&nbsp; The increased costs could be passed onto borrowers through higher loan rates or through increased prices for other services.&nbsp; Alternatively, increased costs could result in lower wages for bank employees or lower dividends to bank shareholders.&nbsp; Regardless of who pays, some in the economy would bear higher costs for the same banking services, which would reduce economic efficiency for everyone.&nbsp; Accordingly, the scale economies provided by large banks are an important source of economic efficiency that benefits our entire economy.<h3>Conclusion</h3>Large banks play an important role in our economy.&nbsp; Their size and scope help them to efficiently achieve the primary function of the banking sector – connecting savers and borrowers.&nbsp; In addition, large banks benefit from significant scale economies that drive efficiencies that reduces costs to benefit the whole economy.&nbsp; Forum members are committed to leveraging these strengths to serve households, communities, and businesses across the country.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;

Large Banks: Broad Economic Reach and Highly Efficient 

Fixing What Ain’t Broken: The Real and Hidden Costs of Excessive Bank Capital Regulation  

<h3>Introduction</h3>Recently, the Federal Reserve’s Vice Chair for Supervision gave a <a href="https://www.federalreserve.gov/newsevents/speech/barr20221201a.htm">speech</a> in which he stated that “current U.S. [capital] requirements are at the low end of the range described in most of the research literature.”&nbsp; This statement should be more closely scrutinized because “most of the research literature” does not explicitly account for all of the enhancements to the large bank regulatory regime that have been enacted since the financial crisis.&nbsp; Indeed, a number of the papers cited in the speech were written before the U.S. reforms were finalized and don’t explicitly account for these reforms in their analysis.&nbsp; It is inappropriate to assess the level of large bank capital without explicitly and holistically considering all of the post-crisis reforms that improve bank resiliency and resolvability.&nbsp; In this blog we focus on one single reform – Total Loss Absorbing Capacity, or “TLAC” requirements.&nbsp; We discuss a Bank of England (BoE) research study on the optimal level of bank capital showing that once TLAC is explicitly considered, the capital level of Financial Services Forum members is at the high end of the range provided in the BoE’s research paper.&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;<h3>Total Loss Absorbing Capacity (TLAC)</h3>In 2015, the Financial Stability Board (FSB) issued the <a href="https://www.fsb.org/2015/11/tlac-press-release/">TLAC standard</a> for global systemically important banks (GSIBs).&nbsp; The external TLAC standard was then finalized as a U.S. rule that applies only to Financial Services Forum members, though other non-U.S. GSIBs are covered by TLAC standards in their home jurisdictions.&nbsp;The external TLAC standard in the U.S. requires that Forum members maintain a prescribed amount of long-term debt that can be converted to equity in the event of significant financial distress to absorb losses and ensure that the firm can continue operating.&nbsp; In this way, TLAC requirements directly support existing and highly rigorous capital requirements and materially enhance the ability of Forum members to absorb losses associated with a financial crisis. &nbsp; Accordingly, when assessing the capital level of U.S. GSIBs, it is critical to explicitly and quantitatively recognize the loss-absorbing capacity of TLAC.In the chart below, we document the level of TLAC for all Forum members as a proportion of their risk-weighted assets.&nbsp; The TLAC amounts reflect both the level of Tier 1 capital and the amount of long-term debt that is eligible to be converted to equity capital.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/chart.png"></figure>&nbsp;As shown in the chart, Forum members maintain TLAC levels that are well in excess of 20 percent.&nbsp; This amount of TLAC substantially buttresses existing capital requirements and provides for an additional layer of loss absorbency over and above existing capital requirements.&nbsp; As a result, when assessing the right level of capital for large banks, it is critical to factor in the large amount of TLAC that is maintained by Forum members.<h3>TLAC and Optimal Capital Levels&nbsp;&nbsp;</h3>So how do TLAC levels translate into resiliency and the optimal amount of bank capital?&nbsp; Economists at the <a href="https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-paper/2015/measuring-the-macroeconomic-costs-and-benefits-of.pdf">Bank of England</a> conducted a research study that directly and quantitatively addresses the impact of TLAC on optimal capital requirements.The BoE researchers found that the existence of significant amounts of TLAC reduces the amount of capital that is required to achieve any desired amount of financial stability because the introduction of TLAC requirements would “reduce their probability of default by individual banks by around 30%.”&nbsp; The BOE estimates of the resiliency-enhancing effects of TLAC are research-based and draw on the same analysis that was used to support the FSB TLAC standard.&nbsp; Accordingly, the BoE’s assessment of the benefits of TLAC is appropriately holistic and internally consistent.The BoE researchers then combine this information with other data on the relative costs and benefits of bank capital and conclude that the optimal level of bank capital ranges from 10 to 14 percent of risk-weighted assets (RWA).&nbsp; The graph below depicts this range as well as the current aggregate capital ratio of Forum members.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-12-09-at-5.28.41-pm.png"><figcaption>Source: Bank of England, Federal Reserve Y9-C</figcaption></figure>&nbsp;&nbsp;&nbsp;As shown in the graphic above, as of Q3 2022, FSF members maintain an aggregate Tier 1 capital ratio that is at the high end of the optimal range found in the BoE study.&nbsp;The BoE research paper recognizes that the optimal range that the authors find is measurably lower than that found by other studies, but they directly attribute this difference to a failure of previous research to account for the resiliency benefits of TLAC: “An important caveat with these studies, however, is that none of them explicitly considered the effects of TLAC and improvements in the UK bank resolution regime.&nbsp; Hence, it is possible that the results from these studies may have overstated the optimum equity capital requirement.” Indeed, the BoE cites previous research papers ignoring the benefits of TLAC that were also included as citations in the Vice Chair’s speech.The recognition that a failure to explicitly consider the benefits of TLAC renders the findings of previous research inapplicable to the current environment is a critical insight that must be reflected in any holistic review of large bank capital requirements.&nbsp; More still, any comprehensive review of current capital levels must explicitly consider the entire range of large bank regulatory requirements that enhance overall resiliency.&nbsp; Such requirements would include new and enhanced resolution requirements and new liquidity requirements, as well as enhanced risk-management standards that have been put in place as part of the Dodd-Frank Act’s enhanced prudential standards framework.&nbsp; An assessment of large bank capital that does not explicitly account for these improvements is conceptually incomplete and sells short the important and significant progress made by regulators and large banks for over a decade.&nbsp;<h3>Conclusion&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;</h3>According to Federal Reserve Chair Jerome <a href="https://www.banking.senate.gov/hearings/cares-act-oversight-of-the-treasury-and-federal-reserve-supporting-an-equitable-pandemic-recovery">Powell</a>, large bank capital levels are at “multi-decade highs.”&nbsp; The strong level of large bank capital that we have today is the result of over a decade of progress that has been made by large banks and regulators to improve their resiliency.&nbsp; The overall resiliency of large banks is supported by these strong capital levels as well as other important changes to the large bank regulatory regime that support bank safety and financial stability.&nbsp; Once additional enhancements are explicitly considered, a systematic and quantitatively rigorous economic analysis shows that Forum members maintain robust capital levels that appropriately support bank safety and financial stability.

A Holistic Look at Large Bank Capital Shows It At the High End of the Optimal Range

<h3>Introduction</h3>Recently, the Federal Reserve indicated that banking regulators will soon release a proposal to implement a further revision to the large bank capital framework, known as Basel III Finalization.&nbsp; This “final” round of Basel reforms is often described as putting the “finishing touches” on the Basel III capital regime.&nbsp; Unfortunately, there are bigger and more consequential open issues with the current large bank capital regime that should be addressed before any “finishing touches” are considered.&nbsp; Moving ahead with Basel III Finalization before addressing these more fundamental concerns would be akin to painting the exterior of a new house before the roof has been finished.&nbsp; A house with a beautiful exterior that floods whenever it rains may have lots of curb appeal and may please the neighbors, but isn’t very functional for its inhabitants. &nbsp;In this post, we discuss the state of the large bank regulatory regime and review some important and long-standing concerns that should be addressed before moving ahead with Basel III Finalization.&nbsp;&nbsp;&nbsp;<h3>The Basel Process is Broken and Must Be Reformed</h3>Basel III Finalization is part of a broader, international standard-setting process in which regulators around the globe negotiate capital standards for internationally active banks.&nbsp; The underlying rationale for global coordination of capital policy is that banking is a global business and even small differences in capital regulation can drive large and destabilizing changes in banking activity.&nbsp; The Basel Committee on Banking Supervision (BCBS) has been setting global capital standards since 1988, but recent events strongly suggest a fundamental breakdown in the process that runs counter to the BCBS’s raison d’etre: globally coordinated and consistent bank capital requirements.Specifically, the European Union (EU) has <a href="https://www.bloomberg.com/news/articles/2022-11-07/eu-set-to-water-down-plan-for-new-bank-capital-standards?sref=DbQo3YbX">proposed</a> implementing Basel III Finalization in a way that significantly deviates from some of its key provisions and would lower the amount of capital required for EU banks relative to the amount that will be required of other banks implementing the reforms. European members of the Basel Committee have warned that this departure will “risk undermining global cohesion.” But this is not the first instance in which the EU banking sector has played by its own rules.&nbsp; Leading examples include not implementing other aspects of the <a href="https://www.risk.net/derivatives/7948491/jpm-eu-corporate-cva-exemption-could-split-swaps-liquidity">Basel III reforms</a> as well as recent EU-led changes to the GSIB surcharge methodology specifically designed to benefit certain <a href="https://fsforum.com/news/the-unlevel-playing-field-gets-even-steeper-changes-to-the-gsib-surcharge-for-european-banks-and-implications-for-the-united-states">EU banks</a>.&nbsp;&nbsp;&nbsp;This breakdown in the Basel process is fundamentally concerning and should be addressed before any additional Basel reforms are implemented in the U.S. Continued implementation of Basel capital reforms that are implemented differently would likely mean that capital requirements for U.S. banks would be raised while other banks around the world would not face the same increases. That would result in increased competitive inequities that undermine, rather than strengthen, the global capital framework.<h3>Large U.S. Banks Are Already Highly Capitalized</h3>The Basel III Finalization package is expected to raise capital requirements for large U.S. banks.&nbsp; Indeed, the EU deviations described above are motivated by the desire of the EU to soften the blow of the oncoming increases in capital requirements for European banks.&nbsp; Before moving ahead with Basel III Finalization, policymakers should consider one basic question: Do U.S. banks need additional capital and if so, why?The data and experience with respect to large bank capital levels is clear.&nbsp; Large banks have substantially raised their capital levels - both in absolute dollar terms and in proportion to their risk-weighted assets - over the past 15 years as shown in the figure below.&nbsp; In addition, as noted of large banks in the Federal Reserve Board’s most recent <a href="https://www.federalreserve.gov/publications/files/202211-supervision-and-regulation-report.pdf">Supervision and Regulation Report</a>, “recent stress test results suggest that these firms remain sufficiently well capitalized to continue lending to households and businesses in a simulated period of stress.”&nbsp; Finally, the recent real world stress test of the pandemic clearly showed that banks are a source of strength to the economy.&nbsp; Simply put, there is no compelling evidence suggesting that large banks suffer from a dearth of capital.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-11-14-at-9.55.20-am.png"><figcaption>Source: Federal Reserve Y-9C</figcaption></figure>&nbsp;Capital is not a free resource in the economy.&nbsp; Ever increasing amounts of required capital will continue to <a href="https://fsforum.com/news/bank-capital-borrowing-costs-and-lending-demand-curves-still-slope-downwards">push up the cost of lending</a> and reduce economic growth.&nbsp;<h3>The Existing Large Bank Capital Regime Needs Significant Reform</h3>The Federal Reserve has recently announced a <a href="https://www.federalreserve.gov/newsevents/speech/barr20220907a.htm">holistic review</a> of the large bank capital regime.&nbsp; This review affords bank regulators with an important opportunity to take a step back and assess the current state of large bank regulation.&nbsp; Any reasonable review of the framework will show that there are several aspects of the capital regime in need of structural reform.&nbsp; These structural reforms should be undertaken, completed, and assessed over a period of time before any “finishing touches” are applied.&nbsp; A short list of reform areas would include:Review and recalibrate the GSIB Surcharge – Upon finalizing the GSIB surcharge in <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20150720a.htm">2015</a>, the Federal Reserve committed to periodic reviews of the GSIB surcharge to reflect economic growth.&nbsp; In addition, the pandemic has revealed significant deficiencies with the GSIB surcharge that also need to be addressed.&nbsp; The largest banks have safer balance sheets because of their increased reserve holdings caused by the Federal Reserve’s pandemic response, yet their GSIB capital charges – intended to reflect systemic risk – have increased merely due to the increased amount of those riskless assets.&nbsp; Any legitimate holistic review of the existing large bank capital regime must include a reconsideration and recalibration of the GSIB surcharge.Review and recalibrate the Supplementary Leverage Ratio (SLR) – Over the past few years, and especially since the onset of the pandemic, the SLR has become increasingly binding and has meaningfully contributed to declining liquidity in the U.S. Treasury market.&nbsp; Treasury market functioning has deteriorated so much that the Group of 30 recently <a href="https://group30.org/images/uploads/publications/G30_Treasury-Mkts-UPDATE_Final_Report.pdf">published</a> an update to its 2021 report exhorting regulators to recalibrate the SLR.&nbsp; In addition, recent <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4175429">research</a> from Federal Reserve economists finds that the SLR materially disincentivizes bank participation in the U.S. Treasury market.&nbsp; In light of the importance of the U.S. Treasury market to the U.S. economy and overall financial stability, it is imperative that regulators act quickly to address this significant problem.Review and reform the stress testing and stress capital buffer (SCB) process – The stress testing process that results in the annual determination of SCBs is opaque and results in substantial year-to-year variation in SCB levels.&nbsp; Over the past three years, the stress testing process has resulted in SCBs that fall by more than half for some while others have nearly doubled from one year to the next.&nbsp; This variability in year-to-year capital requirements injects unnecessary and unhelpful volatility that frustrates good, long-term capital planning.&nbsp; In addition, the opaque nature of the stress tests often produces results that are hard to align with any sensible notion of risk.&nbsp; The stress testing process should be overhauled to improve public transparency and reduce volatility.<h3>Conclusion</h3>Large U.S. banks are well capitalized and are serving our economy well in this period of heightened uncertainty and economic headwinds.&nbsp; There is no compelling evidence to suggest that large U.S. banks are anything but robustly capitalized.&nbsp; Over time, a number of significant and structural shortcomings with the current large bank capital framework have become apparent.&nbsp; These problems have been demonstrated over time and are based on hard facts, data, and research.&nbsp; Regulators should commit to reviewing and addressing these shortcomings before putting further “international” reforms into effect.&nbsp; Finally, the process for international coordination of bank regulation should be overhauled to ensure full coordination and implementation by all parties.&nbsp; A fractured system of coordination in which some countries routinely raise capital standards while others do not will increase, rather than reduce, financial instability and risk.&nbsp;

Don’t Paint the House Before Finishing the Roof: Basel III Finalization and the Large Bank Capital Regime

<h3>Introduction</h3>Since the onset of the pandemic in the U.S. in 2020, U.S.-based Global Systemically Important Banks (GSIBs) have supported businesses, households and communities through expanded <a href="https://fsforum.com/news/the-three-legged-stool-how-large-banks-have-supported-the-economy-during-the-pandemic">lending</a>, increased <a href="https://fsforum.com/news/large-bank-resilience-supporting-depositors-during-the-covid-pandemic">deposits</a>, and robust securities <a href="https://fsforum.com/news/the-three-legged-stool-how-large-banks-have-supported-the-economy-during-the-pandemic">underwriting</a> for public companies seeking private capital.&nbsp; While all of this has been occurring, the Federal Reserve and the rest of the U.S. government have engaged in a massive fiscal and monetary stimulus that has directly and mechanically increased the size of the banking sector.&nbsp; The increased size of the banking sector has resulted in increased GSIB scores of all Forum members and will result in increased GSIB surcharges and capital requirements in 2023.&nbsp; Rising capital requirements will raise the cost of bank lending and depress economic activity at a time that the economy is facing headwinds.&nbsp; The scheduled increases to the GSIB surcharge are the result of government policy, are unrelated to any reasonable notion of systemic risk, do not signal any need for increased capital requirements, and should be arrested before they take effect in 2023.&nbsp;&nbsp;&nbsp;<h3>The Federal Reserve’s Balance Sheet and the GSIB Surcharge</h3>The Federal Reserve supplies the economy with two forms of money: currency and bank reserves.&nbsp; As the Federal Reserve expands its balance sheet by buying more government securities, it increases the amount of bank reserves in the system.&nbsp; During the pandemic, the Federal Reserve engaged in an unprecedented expansion of its balance sheet from roughly $4 trillion to $9 trillion to support the economy.&nbsp; For some perspective, during the financial crisis from 2008 to2009, the Federal Reserve expanded its balance sheet from $1 trillion to $2 trillion.&nbsp; By any standard, the balance sheet expansion we have witnessed recently is without precedent.When the Federal Reserve increases bank reserves, bank assets must rise because only banks can hold bank reserves.&nbsp; Banks have no choice in the matter because the Federal Reserve fully and solely controls the supply of bank reserves.&nbsp; The GSIB surcharge is a capital charge that only applies in the United States to the eight Forum members.&nbsp; According to regulators, the GSIB surcharge is intended to measure the “systemic risk” of a large bank and banks with higher GSIB scores face a higher capital requirement.&nbsp; The GSIB score is based on a complex amalgamation of balance sheet variables such as the size of a bank’s total assets, the amount of securities on its balance sheet, and the amount of certain deposits.&nbsp; As the Federal Reserve’s balance sheet has risen, so too have the total assets and other balance sheet variables of all Forum members.&nbsp; The concomitant rise in Forum member balance sheets is a largely mechanical and unavoidable consequence of the Federal Reserve’s balance sheet policy that has impacted all banks throughout the country.Below, we show two figures demonstrating the pervasive impact of the Federal Reserve’s balance sheet policy on Forum members and the entire banking sector.&nbsp; First, we show a plot of the Federal Reserve’s balance sheet and the aggregate GSIB score of Forum members.&nbsp; This chart clearly shows that starting in 2020 as the Federal Reserve balance sheet began to rise, so too did the GSIB score of Forum members.&nbsp; In the second chart, we show the aggregate GSIB score of all Forum members and that of all other large banks that are required to report their GSIB scores.&nbsp; None of these other large banks are subject to the GSIB surcharge, but are required to report the score for monitoring purposes.&nbsp; This chart also clearly shows that the behavior of Forum GSIB scores is directly in line with developments in the rest of the banking industry.&nbsp; As bank reserves have increased, so too have the total assets and other balance sheet variables of all banks.&nbsp; There is nothing unusual or unique about the recent experience of Forum members.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-11-02-at-11.58.34-am.png"><figcaption>GSIB scores calculated with bank Y-15 reports found at <a href="https://www.ffiec.gov/npw/Institution/TopHoldings.">https://www.ffiec.gov/npw/Institution/TopHoldings.</a> Total assets of the Federal Reserve found at <a href="https://fred.stlouisfed.org/series/WALCL.">https://fred.stlouisfed.org/series/WALCL.</a> GSIB scores weighted by total assets of the banks in each group, found at <a href="https://www.ffiec.gov/npw/FinancialReport/FinancialDataDownload">https://www.ffiec.gov/npw/FinancialReport/FinancialDataDownload</a>.</figcaption></figure>&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-11-02-at-11.58.52-am.png"><figcaption>Reserves and U.S. Treasuries are pulled from the call report: <a href="https://cdr.ffiec.gov/public/PWS/DownloadBulkData.aspx">https://cdr.ffiec.gov/public/PWS/DownloadBulkData.aspx</a>.</figcaption></figure>&nbsp;<h3>Increased GSIB Scores Despite Reduced Systemic Risk</h3>We have established that GSIB scores and surcharges are rising for reasons that are well beyond the control of the affected banks.&nbsp; In addition, however, GSIB scores are rising while systemic risk is declining.&nbsp; Said another way, the heightened scores paradoxically signal lower systemic risk.&nbsp; This is because large banks have significantly increased their holdings of cash and U.S. Treasury securities due to the unprecedented increase in bank reserves.&nbsp; Cash and Treasurys are among the safest financial assets in the world.&nbsp; Cash bears zero default risk while the full faith and credit of the U.S. government stands behind all U.S. Treasurys.&nbsp; &nbsp;A bank with significantly more safe cash and U.S. Treasurys surely presents less, not more, systemic risk to the economy.&nbsp; The figure below shows the increase in cash and U.S. Treasury holdings.&nbsp; Since 2019, cash and U.S. Treasury holdings of Forum members have increased by over $1.2 trillion.&nbsp; Increasing a bank’s GSIB surcharge because it holds “too much” cash and Treasury securities is simply nonsensical.&nbsp; But that is how the GSIB formula is working.&nbsp;&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-11-02-at-11.59.08-am.png"><figcaption>Reserves and U.S. Treasuries are pulled from the call report: <a href="https://cdr.ffiec.gov/public/PWS/DownloadBulkData.aspx">https://cdr.ffiec.gov/public/PWS/DownloadBulkData.aspx</a>.</figcaption></figure><h3>&nbsp;</h3><h3>Increased GSIB Surcharges Will Unnecessarily Raise Borrowing Costs</h3>Some may argue that the Federal Reserve is now engaged in a reduction of its balance sheet and that GSIB scores and surcharges will recede on their own.&nbsp; This argument ignores that current estimates suggest that it will take several years for the Federal Reserve’s balance sheet to normalize.&nbsp; The economy should not be saddled with incoherent and unhelpful capital policy for a period of years while it waits for “things to run their course.”&nbsp; Rather, the Federal Reserve should act now to arrest the oncoming changes and commit to a fuller reevaluation of the GSIB surcharge as part of the announced holistic review of the capital regime that was <a href="https://www.federalreserve.gov/newsevents/speech/barr20220907a.htm">described by the Federal Reserve’s Vice Chair for Supervision</a>.Capital is not a free resource.&nbsp; Capital requirements should reflect real, well-founded risk-based considerations and should not rise as an unnecessary consequence of government policy.&nbsp; The oncoming increases in GSIB surcharges <a href="https://fsforum.com/news/bank-capital-borrowing-costs-and-lending-demand-curves-still-slope-downwards">will result in higher borrowing costs</a> that will put downward pressure on economic activity in the near term.&nbsp; As capital requirements rise, so too will borrowing costs, which will reduce lending and economic growth.In light of current economic headwinds, it is all the more important to ensure that banks can proactively support lending and the economy.&nbsp; Unnecessary and counterproductive increases in capital requirements are never good, but are all the more damaging in the present circumstances.&nbsp;<h3>Conclusion</h3>A willingness to change one’s mind in light of new facts is a hallmark of good decision making.&nbsp; The period of the past few years has, if nothing else, presented the world with a whole new set of facts that demand consideration.&nbsp; The underlying motivations for the GSIB surcharge have been completely upended, and indeed, reversed, by the pandemic and the Federal Reserve’s unprecedented balance sheet policy response.&nbsp; We should not blindly follow a formulaic approach to increasing capital requirements without carefully taking stock of where we are and whether such an increase is warranted.&nbsp; Any reasonable analysis of the facts shows that increasing GSIB capital surcharges at this point in time is unwarranted, unhelpful, and will only serve to weaken our economy.&nbsp; The Federal Reserve should act swiftly to halt these increases before they take effect in January.&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;

Raising the Cost of Credit at the Wrong Time: The Unnecessary and Counterproductive Rise in the GSIB Surcharge

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State Street Corporation

Ron is chairman and chief executive officer of State Street Corporation. He is also a member of State Street Corporation’s Board of Directors.

Ron was previously president and chief operating officer of State Street Corporation, and before that president and chief executive officer of State Street Global Advisors, the investment management arm of State Street Corporation. He joined State Street in 2015.

Prior to State Street, Ron was president of Asset Management & Corporate Services for Fidelity Investments, responsible for all Fidelity asset management organizations and Fidelity’s corporate functions and enterprise technology. He served at Fidelity from 2010 to 2014.

Prior to joining Fidelity, Ron served as president and chief executive officer of BNY Mellon Asset Management in Boston, a position to which he was named in 2007. During this time, he also served as vice chairman of Bank of New York Mellon Corporation and was a member of its Executive Committee. Additionally, Ron oversaw all of Bank of New York Mellon’s activities in Asia. Prior to the 2007 merger of Bank of New York and Mellon, he was vice chairman of Mellon Financial Corporation and president and chief executive officer of Mellon Asset Management. He served at Mellon and Bank of New York Mellon from 1997 to 2010.

Prior to Mellon, Ron was with McKinsey & Company, Inc., from 1986 to 1997 and was elected a partner in 1992. He founded the Investment Management practice worldwide and was co-founder and co-leader of the firm’s North American Personal Financial Services practice. Additionally, he was a member of the Worldwide Property & Casualty Insurance practice. During his tenure with McKinsey, Ron served in the firm’s Boston, New York, and Stockholm offices.

Ron received his Bachelor of Arts degree in political science from Syracuse University in 1980 and his Master of Business Administration from Harvard Business School in 1986.

Ron serves on the boards of Unum Corp. and Rhode Island Commerce Corporation. He also serves on the boards of Beth Israel Lahey Health, The Boston Foundation, IYRS School of Technology and Trades, Syracuse University and WBUR. Ron’s philanthropic and civic interests include corporate governance, retirement/healthcare policy and funding, education, and climate. He has led several initiatives on gender equality. Ron is a frequent speaker and writer, and an avid offshore sailboat racer.

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Ronald O'Hanley

State Street Corporation Chairman And Chief Executive Officer, Forum Chair

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Citigroup

Jane Fraser is the Chief Executive Officer of Citi, the world's most global bank, serving millions of consumers, businesses and institutions across 160 countries and jurisdictions. She is the first female CEO in the firm’s history. Jane has deep experience across Citi’s consumer and institutional businesses and, in many ways, she helped shape Citi into the company it is today. Before becoming CEO in February 2021, she was President of Citi and CEO of the Global Consumer Bank, responsible for all of Citi’s Consumer businesses, including Retail Banking and Wealth Management, Credit Cards, Mortgage and Operations and Technology in 19 markets. Before that, she was the Chief Executive Officer of Citigroup Latin America from 2015 to 2019. From 2013 to 2015, she was the Chief Executive Officer of the U.S. Consumer and Commercial Banking and CitiMortgage. From 2009 to 2013, Jane served as the Chief Executive Officer of Citi's Global Private Bank. Prior, Jane was the Global Head of Strategy and Mergers & Acquisitions for Citi from 2007 to 2009. She joined Citi in 2004 in the Corporate and Investment Banking division.
Before joining Citi, Jane was a Partner at McKinsey & Company. She started her career at Goldman Sachs in the Mergers & Acquisitions department in London and then worked for Asesores Bursátiles in Madrid, Spain. Jane serves as a Board Member for the Business Roundtable and the Council on Foreign Relations. She is Vice Chair for the Partnership for New York City and a member of Harvard Business School’s Board of Dean’s Advisors, the Stanford Global Advisory Board and the Economic Club of New York. Jane has an M.B.A. from Harvard Business School and an M.A. in economics from Cambridge University. She is married with two children.

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Jane Fraser

Citigroup Chief Executive Officer, Forum Vice Chair

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Bank Of America

Brian Moynihan leads a team of more than 200,000 employees dedicated to making financial lives better for people, companies of every size, and institutional investors across the United States and around the world.

Bank of America is recognized as a top employer by Working Mother magazine and Military Times. The company is also listed on Fortune magazine’s list of the Best Workplaces for Diversity and the Best Workplaces for Parents. It was also named one of the Best Places to Work for Disability Inclusion by the U.S. Business Leadership Network and the American Association of People with Disabilities. In 2018, Euromoney recognized Bank of America as the World’s Best Bank and the World’s Best Bank for Diversity and Inclusion, as part of their annual Global Awards for Excellence. Bank of America was also named the 2019 Catalyst Award winner, honored for supporting the continued development, empowerment and advancement of women in the company and around the world.

Moynihan participates in several organizations that focus on economic and market trends, including the World Economic Forum International Business Council, the Financial Services Forum, the Bank Policy Institute (chair), the Business Roundtable, and the American Heart Association CEO Roundtable (co-chair). He is also a member of the Federal Advisory Council of the Federal Reserve Board.

Moynihan leads the company’s Global Diversity and Inclusion Council and is a member of the museum council for the Smithsonian’s National Museum of African American History and Culture. Moynihan is also a member of the Brown University Corporation’s Board of Fellows and the Congressional Medal of Honor Foundation Board.

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Brian Moynihan

Bank Of America Chairman Of The Board And Chief Executive Officer

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BNY Mellon

Robin Vince is President and Chief Executive Officer of BNY Mellon and a member of its Board of Directors. Previously, he was Vice Chair of BNY Mellon and CEO of Global Market Infrastructure. In that role, he oversaw BNY Mellon’s Clearance and Collateral Management, Treasury Services, Markets and Execution Services and Pershing businesses.

Prior to joining BNY Mellon in October 2020, Robin was the Chief Risk Officer of Goldman Sachs and a member of the Management Committee. He joined Goldman Sachs in 1994 and held many leadership roles, including Treasurer, Head of Operations, Head of Global Money Markets, COO of the EMEA region and CEO of Goldman Sachs International Bank, among others. He served on several key subsidiary boards and governance committees. He was named managing director in 2002 and partner in 2006.

Robin is a member of National Geographic Society's Hubbard Council and serves on the Board of Advisors of The Hospital for Special Surgery.

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Robin Vince

BNY Mellon Chief Executive Officer

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The Goldman Sachs Group, Inc.

David Solomon is Chairman and Chief Executive Officer and a member of the Board of Directors of The Goldman Sachs Group, Inc.

Previously, he was President and Chief Operating Officer and prior to that, he served as Co-Head of the Investment Banking Division from 2006 to 2016. Before that, Mr. Solomon was Global Head of the Financing Group, which includes all capital markets and derivative products for the firm’s corporate clients. He joined Goldman Sachs as a Partner in 1999.

Mr. Solomon is a member of the Board of Trustees of Hamilton College and serves on the board of The Robin Hood Foundation.

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David Solomon

The Goldman Sachs Group, Inc. Chairman and Chief Executive Officer

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JPMorgan Chase & Co.

Jamie Dimon is Chairman of the Board and Chief Executive Officer of JPMorgan Chase & Co., a global financial services firm with assets of $2.5 trillion and operations worldwide. The firm is a leader in investment banking, financial services for consumers, small business, commercial banking, financial transaction processing and asset management.

Dimon became CEO on January 1, 2006 and one year later also became Chairman of the Board.  He was named President and Chief Operating Officer upon the company’s merger with Bank One Corporation on July 1, 2004. Dimon joined Bank One as Chairman and CEO in 2000.

Dimon began his career at American Express Company.  Next, he served as Chief Financial Officer and then President at Commercial Credit, which made numerous acquisitions and divestitures, including acquiring Primerica Corporation in 1987 and The Travelers Corporation in 1993. Dimon served as President and Chief Operating Officer of Travelers from 1990 through 1998 while concurrently serving as Chief Operating Officer of its Smith Barney Inc. subsidiary before becoming co-Chairman and Co-CEO of the combined brokerage following the 1997 merger of Smith Barney and Salomon Brothers.  In 1998, Dimon was named President of Citigroup Inc., the global financial services company formed by the combination of Travelers Group and Citicorp.

Dimon earned his bachelors degree from Tufts University and holds an MBA from Harvard Business School. He serves on the boards of directors of a number of non-profit institutions including the Clearing House and Harvard Business School. Additionally, he is the Chairman of the Business Roundtable and serves on the executive committee of the Business Council and the Partnership for New York City, and is a member of the Financial Services Forum, Financial Services Roundtable and Council on Foreign Relations.

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Jamie Dimon

JPMorgan Chase & Co. Chairman And Chief Executive Officer

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Morgan Stanley

Mr. Gorman is Chairman and CEO of Morgan Stanley.

Mr. Gorman became CEO in January 2010 and Chairman in January 2012. He joined the Firm in February 2006 and was named Co-President in December 2007.

Before joining Morgan Stanley, Mr. Gorman held a succession of executive positions at Merrill Lynch. Prior to this, he was a senior partner of McKinsey & Co. and began his career as an attorney in Melbourne, Australia.

Among his civic activities, Mr. Gorman serves as a Director of the Federal Reserve Bank of New York and the Council on Foreign Relations, and is a member of the Board of Overseers of the Columbia Business School, the Monetary Authority of Singapore International Advisory Panel, the Business Council, and the Board of the Institute of International Finance.

He formerly served as President of the Federal Advisory Council to the U.S. Federal Reserve Board, Co-Chairman of the Partnership for New York City, Chairman of the Board of the Securities Industry and Financial Markets Association and Co-Chairman of the Business Committee of the Metropolitan Museum of Art.

Mr. Gorman, who was born in Australia, earned a B.A. and Law degree from the University of Melbourne and an M.B.A. from Columbia University.

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James Gorman

Morgan Stanley Chairman And Chief Executive Officer

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Wells Fargo & Company

Charles W. Scharf is chief executive officer and president, and a member of the Board of Directors of Wells Fargo & Company.

A financial services veteran with 24 years of experience in leadership roles in the banking and payments industries, Charlie served as chief executive officer of Bank of New York Mellon from July 2017 to October 2019 and the chairman of its board from January 2018 to October 2018. He also was chief executive officer and a director of Visa Inc. from October 2012 to December 2016.

During his tenure at Bank of New York Mellon, Charlie demonstrated a strong track record in initiating and leading change, driving results, strengthening operational risk and compliance, and innovating amid a rapidly evolving digital landscape.

As the CEO of Visa, Charlie transformed the firm into a technology-driven digital commerce company by partnering with the world’s leading technology companies to drive new payment experiences and introduce new technologies to improve payment system security.

Previously, he was a managing director of One Equity Partners at JPMorgan Chase & Co. and chief executive officer of Retail Financial Services at JPMorgan Chase. He also was chief executive officer of the retail division of Bank One Corp., chief financial officer of Bank One Corp., chief financial officer of the Global Corporate and Investment Bank division of Citigroup, and chief financial officer of Salomon Smith Barney and its predecessor company.

Charlie earned a Bachelor of Arts degree from Johns Hopkins University and an MBA from New York University.

He is a director of Microsoft Corporation, serves on the board of trustees of Johns Hopkins University, is a member of The Business Council, and is chairman of the New York City Ballet. He lives in New York City.

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