medium_sean_campbell_lobby__1528289102_74.109.38.142 (1).jpg

small_sean_campbell_lobby__1528289102_74.109.38.142 (1).jpg

thumbnail_sean_campbell_lobby__1528289102_74.109.38.142 (1).jpg

sean_campbell_lobby__1528289102_74.109.38.142 (1).jpg

small_sean_campbell.jpg

thumbnail_sean_campbell.jpg

sean_campbell.jpg

Sean Campbell

Chief Economist, Head of Policy Research

<h3>Introduction</h3>Recently, the Basel Committee on Banking Supervision (BCBS) issued a press <a href="https://www.bis.org/press/p220531.htm">release</a> indicating that it had made substantive technical changes to the calculation of the GSIB score for EU-based Global Systemically Important Banks (GSIBs).&nbsp; According to <a href="https://www.ft.com/content/adb97a6a-d93b-4d14-b7d5-07350a3dace2">news</a> reports, the effect of the change will lower the GSIB score and related capital surcharge for some European GSIBs, including one European GSIB that saw its GSIB score increase in 2021 to a level that, absent any changes, would have resulted in an <a href="https://www.fsb.org/2021/11/2021-list-of-global-systemically-important-banks-g-sibs/">increase</a> in its GSIB capital surcharge.&nbsp; The announced change was rather unusual because it was announced via a press release and without any period of notice and comment.&nbsp; Generally, substantive changes to internationally agreed-upon regulations, such as the GSIB surcharge, are only changed after the public is provided with an opportunity to review and comment on the proposed change.&nbsp; By way of example, in the same press release, the BCBS discussed its climate-related guidance and cryptoasset capital rule proposal, both of which were put out for extensive notice and comment.<h3>The Basel Committee’s Change to the GSIB Score for European GSIBs</h3>The specific change announced by the BCBS will treat loan and related exposures of EU-based GSIBs in different EU countries as though they were exposures within a single jurisdiction.&nbsp; This change is impactful for EU-based GSIBs because one of the GSIB score indicators reflects “cross-jurisdictional activity” and greater cross-jurisdictional activity results in a higher GSIB score and surcharge.&nbsp; Before the change was announced, a GSIB based in, say, France would recognize a loan made to a company headquartered in Greece as a “cross-jurisdictional” exposure.&nbsp; Post the change, this exposure is not counted as a “cross-jurisdictional” exposure.&nbsp; More precisely, only one-third of the exposure to Greece would be counted as cross-jurisdictional.&nbsp; The BCBS press release points to the existence of an EU banking union as the primary rationale for this change.&nbsp; While the goal of a banking union is laudable in principle and provides some support for treating exposures within the EU similarly, a banking union is not tantamount to a single, overarching federal government with identical property rights, laws, and, importantly, bankruptcy codes that would determine the disposition of assets in the event of an insolvency.&nbsp;<h3>Broader Issues with the GSIB Surcharge and Its Application in the United States</h3>The recent announcement by the BCBS raises several important questions about the GSIB surcharge and its application in the United States.&nbsp; This recent action makes clear that international regulators are willing to revisit the GSIB surcharge and make targeted adjustments as conditions warrant.&nbsp; At the same time, this specific change announced by the BCBS is rather narrowly focused and only benefits EU-based GSIBs.&nbsp; All other GSIBs, including U.S.-based GSIBs, all of which are Financial Services Forum members, will see no change to their GSIB scores or resulting capital surcharges.&nbsp; It has been long recognized by U.S regulators that the GSIB surcharge should be reviewed and targeted adjustments should be made if the outcome of the review shows changes are warranted.&nbsp; Indeed, the Federal Reserve’s final rule - <a href="https://www.govinfo.gov/content/pkg/FR-2015-08-14/pdf/2015-18702.pdf">published</a> in 2015 - recognized the need for such ongoing review and re-calibration.&nbsp; Specifically, the Board stated that “to ensure changes in economic growth do not unduly affect firms’ systemic risk scores, the Board will periodically review the coefficients and make adjustments as appropriate.” &nbsp;&nbsp;&nbsp;The process resulting in the recent change to the GSIB score methodology for EU-based GSIBs is highly problematic because it has not been done within the context of broader and more holistic review of the framework that would include all major jurisdictions including the United States.&nbsp; The entire rationale for international bodies like the BCBS is to ensure a degree of consistency in international bank regulation.&nbsp; Making changes to the GSIB score methodology for some jurisdictions without even considering changes for other jurisdictions is contrary to the primary motivation for international capital agreements.&nbsp; Some might argue that the recent changes are those of the “Basel Committee” and do not reflect the views of the Federal Reserve.&nbsp; Of course, the Federal Reserve is an influential member of the Basel Committee.&nbsp; Also, the Basel Committee is a consensus-driven body and while we can’t know all of the inner machinations of that body, it is certainly the case that the Federal Reserve was aware of and took part in the deliberations that resulted in the changes for European GSIBs.Some may argue that the recent changes are not relevant for Forum members because they are subject to a different (and more stringent) version of the GSIB surcharge and the changes will have no effect on their capital requirements.&nbsp; This reasoning is severely misguided. All Forum members compete with their European peers at all times and in all places.&nbsp; As we have previously <a href="https://fsforum.com/news/the-gsib-surcharge-and-international-competition-the-unlevel-playing-field">discussed</a>, U.S. firms are already disadvantaged relative to their European counterparts due to more stringent and costly capital requirements.&nbsp; The recent changes that will lower the GSIB surcharge for some European GSIBs only further exacerbates existing and substantial competitive inequities on the capital front.Also, the manner in which the change for European GSIBs was implemented is noteworthy.&nbsp; While there was mention of a review of the methodology that applies to European GSIBs, there was no specific and detailed proposal that was provided for public comment and review.&nbsp; Even now, the specific change to the GSIB methodology for European Banking Union (EBU)-headquartered GSIBs is still unclear because, as the BCBS put it, “in due course, the EU authorities will publish a more detailed description of the methodology and requirements for relevant EBU-headquartered banks to publish the cross-jurisdictional indicators needed to calculate the parallel set of scores.”&nbsp; Had this change been publicly communicated with a proposal and the standard notice-and-comment process, a variety of stakeholders could have weighed in on the proposed changes, including the need to consider broader changes beyond the EU.&nbsp; Such comments could have informed the view of the BCBS and could have resulted in a more fulsome review of the GSIB score methodology with the BCBS as well as its member countries.<h3>Chronic and Acute Problems with the GSIB Surcharge in the United States</h3>Further, the U.S. GSIB score and surcharge are plagued by well-documented chronic and acute problems that are long overdue for redress.&nbsp; On the chronic front, <a href="https://fsforum.com/news/fixing-whats-broken-the-gsib-surcharge-near-and-long-term-problems">as we have discussed</a>, the GSIB surcharge fails to account for economic growth (a problem that does not plague the non-U.S. version of the GSIB surcharge) so that Forum members are subject to higher and higher capital surcharges as the economy grows.&nbsp; On the acute front, <a href="https://fsforum.com/news/bizarro-world-and-the-gsib-surcharge-when-up-means-down">as we have also discussed</a>, the massive macroeconomic stabilization policies of the Federal Reserve and the rest of the U.S. government have resulted in an unprecedented increase in the Federal Reserve’s balance sheet that continues to put upward pressure on Forum member GSIB scores and surcharges despite the fact that an increase in holdings of bank reserves and U.S. Treasury securities (which have funded the government’s fiscal COVID response) actually reduce rather than increase systemic risk.&nbsp; Figure 1 below documents the large increase in GSIB scores that has taken place during the COVID pandemic, underscoring the severity of these chronic and acute problems. Accordingly, there is every reason to engage in a review of the U.S. GSIB score methodology.&nbsp; Making changes to the GSIB score methodology for some firms and not others is even more problematic in light of the well-documented and serious deficiencies of the U.S. methodology.<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-06-09-at-10.42.14-am.png"><figcaption>Source: Federal Reserve Y-15</figcaption></figure><h3>Conclusion</h3>Recently announced changes to the GSIB score methodology for EU-based GSIBs agreed by the BCBS and its members further weakens the competitive standing of large U.S. banks relative to their foreign competitors.&nbsp; Moreover, the GSIB score methodology is ripe for reconsideration in the U.S.&nbsp; Making changes to international banking regulations in an uncoordinated manner erodes the value of international standard-setting bodies such as the BCBS.&nbsp; The Federal Reserve should quickly move to open a review, subject to public review and comment, of the U.S. GSIB score methodology to ensure that international financial regulation is globally coordinated and promotes a healthy and competitive playing field for all.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;

Article

small_capital.png

thumbnail_capital.png

capital.png

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

The Unlevel Playing Field Gets Even Steeper: Changes to the GSIB Surcharge for European Banks and Implications for the United States

medium_kevin_fromer_lobby__1528289124_74.109.38.142.jpg

small_kevin_fromer_lobby__1528289124_74.109.38.142.jpg

thumbnail_kevin_fromer_lobby__1528289124_74.109.38.142.jpg

kevin_fromer_lobby__1528289124_74.109.38.142.jpg

thumbnail_kevin-cropped.jpg

kevin-cropped.jpg

Kevin Fromer

President and Chief Executive Officer

The U.S. payment system is a critically important part of our financial system that positively contributes to the stability and resiliency of our economy.&nbsp; The ability to quickly send and receive secure payments cost-effectively is a basic precondition for a robust market economy in the modern era.&nbsp; The past few years have seen a significant rise in interest in digital payment technologies and that interest has, quite naturally, been followed by significant private market innovation that has expanded the scope of the digital payments frontier.&nbsp; Recently, the Federal Reserve issued a discussion <a href="https://www.federalreserve.gov/publications/money-and-payments-discussion-paper.htm">paper</a> that explores the pros and cons of a potential U.S. central bank digital currency (CBDC).&nbsp; A CBDC would be a digital liability of the Federal Reserve that would be widely available to the public and would provide individuals with additional means of making digital payments.The Forum has <a href="https://fsforum.com/a/media/comment-letter-on-frb-cbdc-discussion-paper.pdf">responded</a> to the Fed’s paper, addressing each of the broad issues and specific questions posed.&nbsp; Here’s what we had to say.First and foremost, Forum members are committed to helping ensure that the United States has a world-leading payment system that allows households and businesses to carry out financial transactions quickly, securely and cost-effectively.&nbsp; Towards this end, Forum members currently offer several payment-related services, such as electronic bill pay and funds transfer services, which offer benefits similar to those envisioned with a CBDC.&nbsp; The Clearing House, which is owned by banks, operates a real-time payment system accessible to financial institutions that hold 75 percent of the nation’s demand deposit accounts (e.g., checking accounts). Private market innovation in the payment space has been robust and continues to bring new payment options to consumers and businesses.&nbsp; As a consequence, the vast majority of money that households and businesses use today for transactions is digital.&nbsp; As of March 2022, over 90 percent of M2 (a broad aggregate measure of money) is in digital form.&nbsp; Anyone who has paid for a cup of coffee or transferred money to a relative with their cell phone can attest to the increasingly common use of digital payments in our economy.&nbsp; &nbsp;&nbsp;As demand for digital payments grows and efforts to further modernize payments continue, the Federal Reserve, other relevant agencies, and the private sector should work together to develop public-private partnerships that can undertake robust research and development about new technologies and infrastructures, including a CBDC.&nbsp; Given the importance of the payment network to our economy, it is crucial that the public and private sector work collaboratively to thoroughly assess the benefits of various digital payment technologies.&nbsp;But beyond questions of need and commercial viability in the case of a CBDC, there are a variety of unique risks that need to be squarely addressed.&nbsp; A CBDC raises potential economic and financial stability risks that could arise in the banking sector and related funding markets.&nbsp; Questions and risks also arise around digital currency interoperability and effective implementation of monetary policy. All of these risks are significant and not well understood.&nbsp;Beyond these issues, a CBDC also raises important questions about the appropriate legal and regulatory framework that would allow it to operate alongside the private payment system, with clear rules of the road that establish a level playing field.&nbsp; These legal and regulatory questions should be placed on equal footing with the commercial and stability risks that have been identified.Innovation is the lifeblood of economic growth.&nbsp; Innovation and progress in the payment system is no different, and the largest banks are constantly working towards a world-leading payment system that offers speed, efficiency, as well as security and stability.&nbsp; The Fed has officially started the CBDC conversation with an open and collaborative approach.&nbsp; Given the novelty of a CBDC, its manifold risks, and its overlap with existing and future private market payment technologies, we believe that it is critical for the Federal Reserve and other parts of the U.S. government to work closely with the private sector to fully understand and document the potential costs and benefits of CBDC to the U.S. economy.&nbsp; The Forum and its members look forward to continued and productive engagement on these important issues. &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;

Look Before You Leap: A U.S. Central Bank Digital Currency Needs More Research and Analysis

medium_Screen Shot 2022-04-27 at 4.07.52 PM.png

small_Screen Shot 2022-04-27 at 4.07.52 PM.png

thumbnail_Screen Shot 2022-04-27 at 4.07.52 PM.png

Screen Shot 2022-04-27 at 4.07.52 PM.png

Kevin Zambrowicz

Managing Director and Associate General Counsel, Office of General Counsel at SIFMA

medium_Screen Shot 2022-04-27 at 4.07.21 PM.png

small_Screen Shot 2022-04-27 at 4.07.21 PM.png

thumbnail_Screen Shot 2022-04-27 at 4.07.21 PM.png

Screen Shot 2022-04-27 at 4.07.21 PM.png

Joe Corcoran

Managing Director and Associate General Counsel in SIFMA’s Capital Markets Group

<h3>Introduction</h3>The COVID pandemic has undeniably injected a high degree of uncertainty into all of our lives.&nbsp; Basic questions around when our kids will go to school, where we will work, and when life will return to “normal” have occupied our collective conscience for the past few years.&nbsp; The Russian invasion of Ukraine has created additional uncertainty about our global economy and inflation, and has led to questions about how businesses will have to adjust.&nbsp; For financial institutions and financial markets, heightened uncertainty can stifle activities and use of resources, creating opportunity costs or other costs.&nbsp;Recently, the Securities and Exchange Commission (SEC) has embarked on a wide-ranging and ambitious agenda to significantly change existing market rules and practices over a short period of time across a variety of interrelated markets.&nbsp; At the same time, U.S. capital markets have performed extraordinarily well against recent global events. Changing the “rules of the road” across an array of connected markets represents an unwelcome source of uncertainty – regulatory uncertainty – that is likely to negatively impact markets and the economy.&nbsp; In this post, we highlight recent research on the impact of uncertainty on the economy and extend previous research to directly incorporate the impact of regulatory uncertainty.&nbsp; Consistent with previous findings, U.S. data indicate that increasing economic policy and regulatory uncertainty have important, negative consequences for the broad economy that can persist for an extended period of time.&nbsp; While added uncertainty should not be used as a blanket objection to all regulation, the negative impacts of heightened uncertainty should be directly considered by regulators as increasing regulatory uncertainty may compound other significant uncertainties and impede the ability of capital markets to continue to support the economy as they have over the past few years.<h3>Economic Policy Uncertainty</h3>The idea that rising uncertainty retards economic growth is well-accepted among economists.&nbsp; When households and businesses are uncertain about the future, they postpone investment and spending plans, which reduces growth.&nbsp; At the same time, empirically measuring the size of this effect is challenged by a lack of good and comprehensive data on “uncertainty.”&nbsp; Uncertainty is, by its very nature, hard to quantify and many simply claim that they can “feel” uncertainty.&nbsp; In economic analysis, “feelings” count for very little – hard data are needed.Recently, however, economists have made substantial progress in empirically measuring economic uncertainty in a rigorous fashion.&nbsp; More specifically, economists at Northwestern, Stanford and the University of Chicago have constructed indexes of economic policy uncertainty that analyze the amount of uncertainty implied by news stories appearing in over 2,000 U.S. newspapers.&nbsp; These <a href="https://www.policyuncertainty.com/categorical_epu.html">indexes</a> are sensible because “news” reflects a release of information that can create uncertainty about the future.&nbsp; These economists have also empirically <a href="https://nbloom.people.stanford.edu/sites/g/files/sbiybj4746/f/qje_bbd.pdf">evaluated</a> the information content of these indexes and compared them to alternative uncertainty measures.&nbsp; They find that these measures convey substantial information about economic uncertainty.&nbsp;Below, we present two measures of economic uncertainty resulting from this research.&nbsp; The first measure, economic policy uncertainty, is a broad measure of economic uncertainty that incorporates uncertainty over taxes, trade, regulation, and a variety of other sources of economic uncertainty.&nbsp; The second measure is more focused and measures financial regulatory uncertainty, which relates to uncertainty over bank capital, other financial regulatory standards, and related developments at key financial regulators, such as the SEC.As shown in the figures below, both broad economic policy uncertainty and financial regulatory uncertainty vary significantly over time.&nbsp; Both indexes experienced sharp rises during the financial crisis between 2008 and 2010 and the onset of the pandemic in 2020, which comports with common sense.&nbsp; Both periods were characterized by highly elevated uncertainty by any measure.&nbsp; The index of financial regulatory uncertainty is significantly more volatile than the broader uncertainty index and exhibited its greatest rise during the period of the financial crisis.&nbsp; Alternatively, the broader economic uncertainty index saw its greatest increase during the onset of the pandemic.&nbsp; More still, both uncertainty measures have exhibited a distinct increase since 2010.&nbsp; Since 2010, both broad policy uncertainty and regulatory uncertainty have increased by over 20 percent relative to their 1985-2010 levels.<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-04-27-at-3.28.04-pm.png"><figcaption>Source: Policyuncertainty.org</figcaption></figure><figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-04-27-at-3.28.58-pm.png"><figcaption>Source: Policyuncertainty.org</figcaption></figure><h3>Economic Policy Uncertainty and the Economy</h3>With concrete and systematic measures of economic uncertainty in hand, we can assess the empirical impact of rising uncertainty on the economy.&nbsp; A broad set of economists from Stanford, the Federal Reserve, and a host of other institutions recently investigated the impact of heightened uncertainty during the COVID era.&nbsp; Specifically, they estimated the dynamic response of industrial production – a high frequency measure of economic output – to increases in uncertainty like those experienced during the COVID era.&nbsp; Their <a href="https://nbloom.people.stanford.edu/sites/g/files/sbiybj4746/f/jpube_altigetal.pdf">research</a> focuses on the broader economic policy uncertainty index shown above.The main findings of their research are reproduced below.&nbsp; The chart below shows the dynamic impact on industrial production from an increase in economic policy uncertainty.&nbsp; As shown in the chart, an increase in policy uncertainty immediately depresses output and the impact worsens and remains negative for nine months before leveling off to zero.&nbsp; Accordingly, rising uncertainty depresses output immediately, but also results in a “hangover” that persists for several months.<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-04-27-at-3.30.02-pm.png"><figcaption>&nbsp;Source: FRED St. Louis, Policyuncertainty.org, and FSF Calculations</figcaption></figure>Describing the underlying rationale for the impact, the authors said, “elevated uncertainty generally makes firms and consumers cautious, retarding investment, hiring, and expenditures on consumer durables.”The authors’ analysis only considered the broadest measure of economic policy uncertainty.&nbsp; We now extend their analysis by conducting the same dynamic analysis described above, with the exception that we incorporate both the broad measure of economic policy uncertainty as well as the narrower measure of financial regulatory uncertainty.&nbsp; The chart below presents the dynamic impact of both uncertainty measures.<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-04-27-at-3.31.01-pm.png"><figcaption>Source: FRED St. Louis, Policyuncertainty.org, and FSF Calculations</figcaption></figure>As in the previous chart, broad economic uncertainty depresses output and the pattern in the results is essentially identical to that shown before.&nbsp; The impact of financial regulatory uncertainty, however, is new and interesting.&nbsp; Like broad economic uncertainty, financial regulatory uncertainty depresses output with a maximum impact that is of similar magnitude to the maximum impact of broad economic uncertainty.&nbsp; The negative impact of financial regulatory uncertainty, however, abates much more slowly and continues to drag on the economy for at least two years.&nbsp; Accordingly, these results provide direct, data-based evidence that increasing financial regulatory uncertainty places an important drag on the economy that persists for a significant period of time.The underlying rationale for the identified negative impact of financial regulatory uncertainty is likely similar to that identified by the authors of the aforementioned research.&nbsp; Increasing uncertainty over financial regulation and the “rules of the road” make it difficult for financial intermediaries and end users alike to plan, invest, and engage in financial market activities that support the economy.&nbsp; The long-lived nature of the negative impact may also relate to the often-lengthy process by which financial rules are changed.&nbsp; Uncertainty that results from a spate of new rule proposals, for example, may hang in the air for years until new rules are finalized and implemented.&nbsp;&nbsp;<h3>Implications for the SEC Rulemaking Agenda</h3>Both previous research and the newer results presented here show that increasing economic and regulatory uncertainty places a measurable drag on the economy for up to two years.&nbsp; As we have recently <a href="https://fsforum.com/news/the-sec-s-current-far-ranging-and-aggressive-rulemaking-agenda-will-raise-regulatory-uncertainty-and-risks-unintended-negative-consequences">highlighted</a>, the SEC has engaged in a large number of rulemakings that simultaneously impact a number of interrelated markets.&nbsp; The sudden, rapid-fire slate of proposals represents a measurable increase in regulatory uncertainty that may not be fully resolved for a number of years.&nbsp; At the same time, these results should not be interpreted to imply that any change to financial rules is problematic.&nbsp; That is not the case. Over time, as markets and economies evolve, all regulation can benefit from being updated to account for new realities.&nbsp; These changes, however, must be approached methodically and systematically.&nbsp; Relatedly, and as discussed in our recent <a href="https://fsforum.com/a/media/importance-of-appropriate-length-of-comment-periods.pdf">comment</a> to the SEC, proposals should be subject to reasonable comment periods that give the public ample time to reflect and respond on how proposed changes affect the market under consideration, related markets, and the broader economy.&nbsp; More still, it may well be sensible to allow for the adoption of some new rules to mature and “settle out” before pursuing yet more changes to financial markets.&nbsp; A rushed “ready, fire, aim” approach to regulation may well do more harm than good as the negative consequences of increased uncertainty outweigh any other potential benefits.<h3>Conclusion</h3>Some amount of uncertainty and risk is a necessary part of life that can’t be avoided.&nbsp; At the same time, the evidence is clear that increasing uncertainty places a drag on the economy that can persist for years.&nbsp; The world now finds itself faced with a number of sources of significant uncertainty.&nbsp; We are still working our way through the pandemic and the latest virus variant.&nbsp; The macroeconomic picture is clouded by inflation that is at a 40-year high and rising.&nbsp; Geopolitical uncertainties are also at a high not seen in decades.&nbsp; In the midst of all this uncertainty, regulators should take great care in how they approach financial regulation that may cloud the picture even more.&nbsp; In addition, the U.S. capital markets have been a clear bright spot over the past few years as companies, municipalities, and the U.S. government have all made significant use of market-based finance to manage through the pandemic.&nbsp; Regulators should ensure that they successfully steward the capital markets that have been such a source of strength and resiliency through these highly uncertain times.&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;

The SEC Agenda and the Economic Costs of Heightened Regulatory Uncertainty

<h3>Introduction</h3>Just as the world is coming out of a 100-year pandemic, still uncertain what the “new normal” will be, we are now facing considerable economic headwinds. &nbsp;Inflation has climbed to a 40-year high. &nbsp;Interest rates are rising.&nbsp; Geopolitical events threaten to upend how the global economy has functioned for decades. &nbsp;Supply chain disruptions persist.&nbsp; Bottom line: while the worst of COVID appears behind us, there are a lot of unknowns in the world today.To get through this unpredictable and volatile time, the U.S. capital markets – and the businesses, workers, and families that depend on them – need certainty, stability, and prudence from Washington.&nbsp; Unfortunately, the Securities and Exchange Commission (SEC) is pursuing an unprecedented rulemaking agenda that could compound our current challenges and result in adverse consequences for the real economy in terms of output, employment, investment, and prices.&nbsp;<h3>The SEC’s Agenda is Unprecedented and Presents a Number of Risks&nbsp;&nbsp;</h3>As of last fall, the SEC had 54 separate items on its rulemaking agenda, according to the Office of Information and Regulatory Affairs’ (OIRA).&nbsp; This represents “one of the most ambitious agendas in the SEC’s 87-year history,” according to Bloomberg. &nbsp;In fact, in just the first quarter of 2022, the SEC issued 16 new rule proposals, which is only the third time in the 21st Century that it has put out more than 8 new rules in Q1.&nbsp; In the first quarter of 2004 and 2011, the SEC released, respectively, 16 new rules following the accounting and corporate scandals of Enron and WorldCom and 17 new rules following the global financial crisis and Dodd-Frank Act.&nbsp; Excluding 2004, 2011, and 2022, the SEC has issued an average of 3.3 new first-quarter rule proposals since 2000.&nbsp; Unlike those two previous periods, the 16 SEC rules that were released in Q1 2022 are not responding to a major crisis driven by financial institutions, markets or public companies.&nbsp; Rather, financial institutions and markets have been a helpful and important source of strength and stability during the challenge of the past few years.&nbsp;In addition to the sheer volume of changes being proposed, the SEC is limiting public comment in an unprecedented way.&nbsp; Historically, the SEC has given the public between 60 and 90 days to comment on most rule proposals after they are published in the Federal Register. &nbsp;During the tenure of Chair Mary Jo White (2013 – 2017), the public had 60 days to comment on rule proposals 82 percent of the time and 90 days 14 percent of the time.&nbsp; Similarly, under Chair Jay Clayton (2017 – 2020), the SEC used 60-day and 90-day public comment periods 76 percent and 9 percent of the time, respectively.&nbsp; By contrast, under the current Chair &nbsp;- Gary Gensler - &nbsp;the SEC has provided 60-day comment periods only 7 percent of the time, and on average the public has had only 38 days to review and comment on a rule proposal.The volume and velocity of SEC rulemaking (<a href="https://www.sec.gov/rules/proposed.shtml">https://www.sec.gov/rules/proposed.shtml</a>) are especially concerning given that many of the proposed rules include sweeping changes that could require significant shifts in industry operations and practices.&nbsp; Such large-scale changes to an array of markets entails significant risk.&nbsp; Anytime the underlying “rules of the road” are changed significantly there is an increase in uncertainty as markets and investors respond to the new “rules of the road”.&nbsp; Large scale changes to the “rules of the road” across many markets increases regulatory uncertainty and risks depressing economic activity.<h3>Rising Policy Uncertainty Presents Risk to the Economy</h3>In the past ten years, economists have rigorously measured economic policy uncertainty and its impact on the U.S. economy.&nbsp; The evidence clearly shows that policy uncertainty has been rising steadily for more than a decade, both when assessed by broad measures of overall economic policy uncertainty that include tax and trade policy, as well as by narrower measures of regulatory policy uncertainty.&nbsp; The table below shows the increase in broad economic policy uncertainty and regulatory policy uncertainty taken from research-based policy uncertainty <a href="https://www.policyuncertainty.com/index.html">indexes</a> constructed by economists from Northwestern University, Stanford University and the University of Chicago.&nbsp;<figure class="table" style="width:472.25pt;"><table style="border-bottom:none;border-left:none;border-right:none;border-top:none;"><tbody><tr><td style="border-bottom:1.0pt solid windowtext;border-left:1.0pt solid windowtext;border-right:1.0pt solid windowtext;border-top:1.0pt solid windowtext;padding:0in 5.4pt;vertical-align:top;width:472.25pt;" colspan="3">U.S. Policy Uncertainty: 1985-2022</td></tr><tr><td style="border-bottom:1.0pt solid windowtext;border-left:1.0pt solid windowtext;border-right:1.0pt solid windowtext;border-top:1.0pt none windowtext;padding:0in 5.4pt;vertical-align:top;width:155.8pt;">&nbsp;</td><td style="border-bottom:1.0pt solid windowtext;border-left:none;border-right:1.0pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:155.85pt;">Economic Policy Uncertainty</td><td style="border-bottom:1.0pt solid windowtext;border-left:none;border-right:1.0pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:160.6pt;">Regulatory Policy Uncertainty</td></tr><tr><td style="border-bottom:1.0pt solid windowtext;border-left:1.0pt solid windowtext;border-right:1.0pt solid windowtext;border-top:1.0pt none windowtext;padding:0in 5.4pt;vertical-align:top;width:155.8pt;">1985-2009</td><td style="border-bottom:1.0pt solid windowtext;border-left:none;border-right:1.0pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:155.85pt;">100</td><td style="border-bottom:1.0pt solid windowtext;border-left:none;border-right:1.0pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:160.6pt;">100</td></tr><tr><td style="border-bottom:1.0pt solid windowtext;border-left:1.0pt solid windowtext;border-right:1.0pt solid windowtext;border-top:1.0pt none windowtext;padding:0in 5.4pt;vertical-align:top;width:155.8pt;">2010-2022</td><td style="border-bottom:1.0pt solid windowtext;border-left:none;border-right:1.0pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:155.85pt;">119</td><td style="border-bottom:1.0pt solid windowtext;border-left:none;border-right:1.0pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:160.6pt;">133</td></tr><tr><td style="border-bottom:1.0pt solid windowtext;border-left:1.0pt solid windowtext;border-right:1.0pt solid windowtext;border-top:1.0pt none windowtext;padding:0in 5.4pt;vertical-align:top;width:472.25pt;" colspan="3">Source: <a href="http://www.policyuncertainty.com">www.policyuncertainty.com</a></td></tr></tbody></table></figure>&nbsp;What is the impact of this policy uncertainty on the economy?&nbsp; Again, peer reviewed economic research has explored this question, and the findings are significant.&nbsp; Economists find that heightened uncertainty has a real and significant negative effect on economic performance.&nbsp; Specifically, in “<a href="http://www.policyuncertainty.com/media/EPU_BBD_Mar2016.pdf">Measuring Economic Policy Uncertainty</a>”, Scott R. Baker, Nicholas Bloom, and Steven J. Davis find “that policy uncertainty is associated with greater stock price volatility and reduced investment and employment in policy-sensitive sectors like defense, healthcare, finance and infrastructure construction.&nbsp; At the macro level, innovations in policy uncertainty foreshadow declines in investment, output, and employment in the United States.”&nbsp; These findings are important, especially given the considerable social, geopolitical, and economic uncertainties facing the world today.Injecting regulatory uncertainty into many aspects of the U.S. capital markets could result in adverse consequences.&nbsp; The process of implementing large-scale changes to federal regulations, like those issued by the SEC, can take several years and is often marked by deep uncertainty caused by litigation challenges and the need for further rulemaking to clarify inconsistencies or resolve problems in the original rule that surface during implementation. In such conditions, investors, securities firms, and other market participants might respond to heightened uncertainty over the “rules of the road” by pulling back from investing in securities and bonds, which could make it harder and more expensive for businesses to raise capital and, in turn, impact the employees and customers of business across every sector of the economy.&nbsp; Companies might be forced to wait to offer new products, invest in infrastructure, and generally be more cautious about their investment and hiring decisions.The harmful effects of rising policy uncertainty underscore the danger of simultaneously implementing a large number of interrelated, untested policy changes and point to the need for the SEC to streamline and prioritize its regulatory agenda.&nbsp; &nbsp;&nbsp;<h3>An Aggressive and Accelerated Regulatory Agenda Risks Market Stability and Investor Confidence</h3>SEC rulemaking does not occur in a vacuum.&nbsp; The capital markets have long been one of the most regulated sectors of our economy.&nbsp; Chart 1 shows the multitude of new regulations issued by the SEC and other federal agencies impacting participants in the capital markets. &nbsp;Implementing all these new rules on a compressed timeline has the potential to create risk by overtaxing technological, operational, and compliance resources of financial institutions of all sizes.Designing and implementing each of these proposals individually – let alone all at the same time – is a major regulatory undertaking that needs thoughtful consideration, especially given the state of the global economy today. &nbsp;Accelerating these rules through the regulatory process impairs the SEC’s ability to fully analyze the proposals and understand their possible adverse consequences.&nbsp;A case in point is proposed rule 10B-1, which sets forth security-based swap (SBS) position reporting requirements.&nbsp; As noted extensively in the public comments, the SEC’s cost-benefit analysis of 10B-1 does not account for several significant potential adverse impacts. &nbsp;For example, the Council for Investor Rights and Corporate Accountability <a href="https://www.sec.gov/comments/s7-32-10/s73210-20120747-272911.pdf">stated</a>, the SEC “fails to evaluate the chilling effect that the Proposed Rule will have on activist investors and the harmful collateral effects that a reduction of such corporate activism will have on retail investors and other stakeholders.” &nbsp;Other commenters noted that the SEC did not analyze the proposal’s impact in terms of curtailed market activity, reduced liquidity, and constrained capital formation for issuers and borrowers.But these comments, and many more like them, do not account for the “unknown unknowns” – the unintended consequences of new regulations that are impossible to foresee in advance.&nbsp; Will changing SPAC regulations hinder capital raising?&nbsp; Will changing aspects of reporting securities lending arrangements and short sale activity impact stock market liquidity?&nbsp; The number and potential impact of these unintended consequences increase with the interconnectedness of our financial system and the broader economy.<h3>SEC Rules Have Far-Reaching Effects Across Our Interconnected Financial System and Economy</h3>A central lesson of the 2008 financial crisis was that there are deep, complex, and often hard to anticipate interconnections within our financial system and across the broader economy.&nbsp; This interconnectedness increases the risk that the SEC’s current “everything rulemaking agenda” will lead to harmful unintended consequences. &nbsp; &nbsp;Consider the SEC’s money market mutual fund proposal.&nbsp; Money market funds are a key source of banks’ short-term wholesale funding, but this proposal could impede banks’ ability and willingness to utilize them, especially in the context of swing pricing.&nbsp; Banks, therefore, might be forced to rely more on longer term funding, which likely would increase funding costs.&nbsp; If this scenario materializes, banks will have to either pass on the higher funding cost to the real economy or risk lower earning ability which in turn could negatively impact capital ratios.<a href="https://www.sec.gov/oca/staff-accounting-bulletin-121">SEC Staff Accounting Bulletin No. 121</a>, though not a formal rulemaking, could also have unintended impacts.&nbsp; This staff-level guidance has the potential to force financial institutions that custody crypto-assets to bring these crypto-assets on balance sheet for accounting purposes.&nbsp; If these financial institutions also are bank affiliates subject to prudential regulations, the SEC’s SAB could have direct prudential capital consequences.As we learned in 2008, many interconnections within our financial system and across the economy only become visible in a stressed environment.&nbsp; And a significant body of economic research suggests that rushing through a multitude of sweeping regulatory changes simultaneously could contribute to such stressed conditions.<h3>A Well Thought-Out, Measured &amp; Prioritized Agenda Is the Most Prudent Approach</h3>We believe a more prudent approach to the “everything rulemaking agenda” is for the SEC to prioritize the most pressing regulatory issues that support market resilience and efficiency and to allow for more meaningful stakeholder input and evaluation of rule proposals’ cumulative impacts.&nbsp; In doing this the SEC should consider not only each individual issue, but also its possible connection with other issues and how any proposed changes might compound our current economic challenges like inflation.&nbsp; The SEC should also act in a deliberate manner that provides markets and investors with enough time to absorb the impact of new rules so as to moderate the total amount of uncertainty created through the regulatory process.&nbsp; There are certainly areas of our capital markets in need of reform, but any changes must be implemented with caution and care with an eye towards managing and improving the overall financial system.&nbsp;<h3>Chart 1: Implementation for Recently Proposed/Finalized Capital Markets’ Regulations</h3>The chart below illustrates the implementation timeline for a broad range of financial regulations in various stages of proposal or implementation. As shown, the simultaneous implementation of a multitude of rules on a compressed timeline could strain SIFMA members’ resources and has the potential to create risk by overtaxing industry technology, operational, and compliance resources. Financial institutions of all sizes and business models will be impacted by some or all these regulations to varying degrees.&nbsp;Additionally, the timelines are subject to change as the industry adopts new rules and amendments.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/chart-2.png"></figure>All timelines with relation to proposed rules are SIFMA staff estimates. Certain Banking Regulator deadlines may extend further than Fiscal Year 2025. *Amendments to Exchange Act Rule 3b-16 and Reg ATS Proposal are to be determined. It is too early to specify a timeline. Reg ATS includes U.S. Treasury and Agency Securities, NMS Stocks and Other Securities. **The FINRA Rule 4210 effective date may be significantly delayed by litigation. ***Updates to Short Selling Reporting Proposal are to be determined. It is too early to specify a timeline.

The SEC’s Current Far-Ranging & Aggressive Rulemaking Agenda Will Raise Regulatory Uncertainty and Risks Unintended, Negative Consequences

<h3>Introduction</h3>Policymakers are increasingly focusing on climate-related financial risks (CRFR) in the banking sector.&nbsp; Importantly, the <a href="https://www.fdic.gov/news/board-matters/2022/2022-03-29-notational-fr.pdf?source=govdelivery&amp;utm_medium=email&amp;utm_source=govdelivery">Federal Deposit Insurance Corporation</a> (FDIC), the <a href="https://www.occ.gov/news-issuances/bulletins/2021/bulletin-2021-62.html">Office of the Comptroller of the Currency</a> (OCC) and the <a href="https://www.bis.org/bcbs/publ/d530.pdf">Basel Committee on Banking Supervision</a> (BCBS) recently released draft guidance on managing climate-related financial risks.&nbsp; These policies apply only to large banks.&nbsp; In the case of the FDIC and OCC draft guidance, the proposed guidance only applies to banks with more than $100 billion in total assets.&nbsp; In light of this focus on large banks, we examine whether large banks are most exposed to CRFR.&nbsp; Using government data on the incidence of climate-related natural disasters and data on the geographic distribution of small business loans, we find that larger banks exhibit the least significant exposures to climate-related financial risks.&nbsp; More specifically, we find that among the 50 banks with the most exposure to CRFR, 46 of these banks have total assets less than $100 billion and have average total assets of roughly $16.5 billion.&nbsp; In a larger sample of over 600 banks, we find that the smallest 20 percent of banks account for over 50 percent of all estimated climate-related losses while the largest 20 percent of banks account for less than 20 percent of all such losses.&nbsp; As policymakers continue to consider CRFR, the lower risk of large banks relative to the rest of the banking sector should be considered.<h3>Data-Based Estimates of CRFR&nbsp;&nbsp;</h3>Despite the increased focus and interest in the topic, actual data-based measures of CRFR in the banking sector are few and far between.&nbsp; In this post, we consider two related, but distinct estimates of CRFR based on FEMA’s <a href="https://www.fema.gov/flood-maps/products-tools/national-risk-index">National Risk Index for Natural Hazards</a>.&nbsp; The FEMA index uses historical data on 18 natural hazards such as heat waves, hurricanes, lightning strikes, and wildfires to estimate the annual economic losses arising in each county across the United States.&nbsp; Each county is then assigned a score and an annual loss estimate associated with its total natural disaster risk.&nbsp; The table below shows the top five counties in the United States with the highest index scores.&nbsp;<figure class="table" style="text-align:center;"><table style="border-bottom:none;border-left:none;border-right:none;border-top:none;"><tbody><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:1pt solid windowtext;padding:0in 5.4pt;vertical-align:top;width:323.75pt;" colspan="4">National Risk Index for Natural Hazards: Riskiest U.S. Counties</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:116.85pt;">County</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:58.4pt;">State</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:63pt;">Risk Score</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:85.5pt;">Annual Loss ($)</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:116.85pt;">Los Angeles</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:58.4pt;">CA</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:63pt;">100</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:85.5pt;">1.4 billion</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:116.85pt;">Harris</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:58.4pt;">TX</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:63pt;">93.6</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:85.5pt;">1.2 billion</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:116.85pt;">Santa Clara</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:58.4pt;">CA</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:63pt;">66.1</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:85.5pt;">0.4 billion</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:116.85pt;">Riverside</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:58.4pt;">CA</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:63pt;">64.9</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:85.5pt;">0.4 billion</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:116.85pt;">Alameda</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:58.4pt;">CA</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:63pt;">64.8</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:85.5pt;">0.4 billion</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:323.75pt;" colspan="4">Source: FEMA</td></tr></tbody></table></figure>Natural disaster risk is not a perfect measure of climate risk.&nbsp; Indeed, some of the constituents of the index, such as volcanic activity, have no obvious relationship with climate change.&nbsp; Moreover, the precise relationship between climate change and natural disasters such as hurricanes and floods is itself a subject of ongoing and evolving climate research.&nbsp; At the same time, some have suggested that climate change may impact the severity and volatility of events such as hurricanes, wildfires and floods that are included in the index.&nbsp; Accordingly, as a first step, it is worth considering the FEMA index as one measure of climate risk.The FEMA index is one measure of climate risk, but it is not a measure of climate-related financial risk in the banking sector.&nbsp; To estimate CRFR in the banking sector, we need geographical data on bank assets.&nbsp; We make use of OCC data on the number and amount of small business loans (loans under $1 million) made by U.S. banks in 2020.&nbsp; In 2020, all banks with total assets above $1.3 billion were required to report the amount and number of small business loans made in each U.S. county they served.&nbsp; These data represent over 8 million loans that were made in over 3,000 U.S. counties with an aggregate value of over $448 billion, which accounts for roughly 20 percent of all commercial and industrial lending by banks.&nbsp; Of course, small business lending does not comprise all of a bank’s assets that are subject to CRFR, but there is likely a strong correlation in the geographic pattern of a bank’s small business lending and the rest of its assets.&nbsp; A bank that only makes small business loans in a few geographically proximate counties is also likely to have mortgage and consumer lending assets that are similarly geographically concentrated.&nbsp; Alternatively, a bank that makes small business loans all across the country is also more likely to engage in mortgage and consumer lending that is geographically diversified.&nbsp; Accordingly, combining the OCC small business data with the FEMA data results is a useful and credible measure of CRFR across the banking sector.In what follows we consider two specific measures of CRFR.<ol><li>Risk Score – this CRFR measure is the weighted average Risk Score among all counties in which the bank extends small business loans.&nbsp; A bank that made all of its loans in L.A. County would exhibit a score of 100.&nbsp; Banks with higher Risk Scores have borrowers located in areas more prone to natural disasters that may impact loan losses.</li><li>Annual Loss – this CRFR measure is the total amount of annual losses borne by each bank in the OCC small business loan sample.&nbsp; More specifically, for each county, we calculate the bank’s share of total small business lending in that county and then we apportion that share of FEMA’s estimated annual losses to that bank.&nbsp; We then sum each bank’s annual losses across each county in which it lends.&nbsp; As an example, if one bank made 20 percent of all the small business loans in L.A. County, it would be allocated $280 million in annual losses (0.2 x $1.4 billion) in L.A. County.&nbsp; Its overall annual loss would then be determined by the amount of annual losses it was allocated in every other county in which it made small business loans.</li></ol>Both the Risk Score metric and the Annual Loss metric provide related, but distinct measures of CRFR.&nbsp; Importantly, the Risk Score does not distinguish a smaller bank from a larger bank.&nbsp; A small bank that does 100 percent of its lending in L.A. County will have a higher risk score (100) than a larger bank that does 100 percent of its lending in Alameda County (64.8).&nbsp; The annual loss metric explicitly accounts for size so that a larger bank lending in more counties exhibits a higher annual loss.&nbsp; Both the score and the loss metric have relevance for measuring CRFR so we consider both.&nbsp;<h3>Risk Score – Top 50 Riskiest Banks</h3>The chart below shows the Risk Score (right-hand axis) and the total assets (left-hand axis) of the 50 banks with the highest Risk Score.&nbsp; The bank with the highest Risk Score has a score of 87 – as indicated by the left-most orange dot – and a total asset size of $9.3 billion – as indicated by the left-most blue bar.&nbsp; Moving to the right in the chart shows banks with progressively lower Risk Scores. &nbsp; &nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-03-30-at-10.47.23-am.png"></figure>As shown in the chart, most of the banks with a top 50 risk score have total assets far below $100 billion.&nbsp; Indeed, only 4 of the 50 banks have assets over $100 billion and none of the banks in the sample have total assets in excess of $250 billion.&nbsp; Of the 46 banks with total assets less than $100 billion, the average of total assets is only $16.5 billion.&nbsp; Moreover, while some large banks exhibit a top 50 risk score, the largest banks - those with total assets in excess of $500 billion or more - do not exhibit a top 50 risk score. These results are largely explained by the ability of large banks to diversify their lending across geographic boundaries.&nbsp; Unlike many smaller banks, large banks are able to diversify their lending all across the country and do not exhibit significant lending concentrations in areas with particularly high natural disaster risks.&nbsp; &nbsp;&nbsp;<h3>FEMA Annual Loss Lorenz Curve</h3>We now consider the Annual Loss metric and rather than considering only the top 50 banks, we consider all banks that report their small business lending – roughly 600 banks.&nbsp; Together, these banks account for $20 trillion in banking assets, or roughly 80 percent of all U.S. banking assets. &nbsp;The chart below shows the Lorenz curve associated with bank assets and annual losses.&nbsp; A Lorenz curve is a common graphical tool that is used to display how a variable is distributed across a population.&nbsp; The chart shows the 45-degree line that is the Lorenz curve that would result if annual losses were uniformly distributed throughout the banking sector.&nbsp; If annual losses were uniformly distributed across the banking sector (the $20 trillion of bank assets accounted for by these banks), the smallest 20 percent of banks would account for 20 percent of annual losses, the smallest 40 percent of banks by assets would account for 40 percent of annual losses and so on until 100 percent of bank assets account for 100 percent of annual losses.<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-03-30-at-10.46.58-am.png"></figure>As can be seen in the chart, the Lorenz curve lies well above the 45-degree line.&nbsp; This means that smaller banks account for a relatively larger share of annual losses.&nbsp; More specifically, the smallest 20 percent of banks in the sample account for roughly 55 percent of all annual losses while the smallest 40 percent of banks account for roughly 75 percent of all annual losses.&nbsp; Accordingly, these data clearly show that smaller banks have more concentrated CRFR that result in a larger share of total annual losses in the United States.&nbsp;Again, this finding can be understood in terms of risk concentrations.&nbsp; Large banks maintain broad, well-diversified portfolios that are invested in a variety of communities all across the country.&nbsp; As a result, large banks are lending in both high- and low-risk areas that, across an entire portfolio, balance each other out.&nbsp;<h3>Conclusion</h3>Regulators have increased their focus on CRFR recently.&nbsp; The extent of CRFR in the banking sector is not well understood at the present time.&nbsp; In particular, data limitations make the assessment of CRFR challenging.&nbsp; Using government data on the risk of natural hazards and the location of small business lending, we construct two complementary measures of CRFR.&nbsp; We show that larger banks are less exposed to CRFR.&nbsp; This is driven by the ability of large banks to broadly diversify their lending all across the country.&nbsp; As regulators continue to consider CRFR as a safety and soundness matter, there should be a greater effort to empirically measure CRFR across the entire banking sector and take into consideration the relatively low exposure large banks have to climate-related financial risks.

large_AdobeStock_256710240.jpg

medium_AdobeStock_256710240.jpg

small_AdobeStock_256710240.jpg

thumbnail_AdobeStock_256710240.jpg

AdobeStock_256710240.jpg

Forum members recognize that climate change poses risks to the world’s economy.
The transition to a low-carbon economy will occur over several decades and requires collaboration between a wide range of industries and government. The Forum advocates for appropriate policies and international cooperation to ensure that climate policies and regulations related to the financial industry are based on science, risk, and sound methodologies.


Climate Finance

Climate-Related Financial Risk and Bank Size: When Bigger is Smaller

<h3>Introduction</h3>All good Superman fans are familiar with Bizarro world – a land in which up is down and everything is backwards.&nbsp; In Bizarro world, Superman is a villain and everything is the opposite of what it should be.&nbsp; Without a doubt, the events of the past two years have thrust all of us into situations that have a certain “bizarro” element to them in one way or another – how else would you describe working from home in your pajamas?&nbsp; In the bank regulatory sphere, the case of the GSIB surcharge presents just such a situation that cannot go unexamined.&nbsp; More specifically, over the last few years, the score upon which the GSIB surcharge is based has drifted further and further away from economic reality and now presents a particularly distorted view of systemic risk that should be addressed by regulators.&nbsp; In this post, we review the recent trend in the GSIB score and demonstrate how its growth actually signals reduced systemic risk.&nbsp; Paradoxically, if left unabated, the GSIB surcharge will demand ever higher amounts of required capital from large banks that have actually reduced their level of systemic risk over the past few years.&nbsp; Accordingly, regulators should act promptly to address these shortcomings before they unnecessarily distort capital and lending decisions in the U.S. economy.<h3>The GSIB Surcharge</h3>The Federal Reserve’s GSIB surcharge is an additional capital surcharge that is applied to U.S. Global Systemically Important Banks (GSIBs) – all of which are Financial Services Forum members.&nbsp; The level of the capital surcharge depends on a regulator-defined measure of systemic risk - the GSIB score.&nbsp; A higher GSIB score, according to regulators, equates to a higher level of systemic risk and a higher GSIB surcharge.&nbsp; The GSIB score itself depends on a number of complex metrics, but the score metrics can be classified into the following five broad categories depicted in Table 1.&nbsp; In the table we also provide a brief characterization of regulators’ rationale underpinning each category’s inclusion in the GSIB score as a measure of “systemic risk.”<figure class="table" style="text-align:center;"><table style="border-bottom:none;border-left:none;border-right:none;border-top:none;"><tbody><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:1pt solid windowtext;padding:0in 5.4pt;vertical-align:top;width:355.25pt;" colspan="2">Table 1: GSIB Score Components and Regulator Rationale</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:166.5pt;">GSIB Score Category</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:188.75pt;">Rationale for Inclusion in GSIB Score</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:166.5pt;">Size</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:188.75pt;">The failure of a large bank causes more damage to the economy than that of a small bank</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:166.5pt;">Interconnectedness</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:188.75pt;">A bank that is more connected to other entities may cause more damage to the economy if it fails as its failure will have greater “knock-on” effects</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:166.5pt;">Complexity</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:188.75pt;">A bank that is more complex is more likely to be subject to complex risks that are systemically risky</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:166.5pt;">Cross-Jurisdictional Activity</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:188.75pt;">A bank that has more activity across countries is more likely to present systemic risks internationally</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:166.5pt;">Short-Term Wholesale Funding (STWF)</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:188.75pt;">A bank that funds itself with more short-term debt is more likely to experience a destabilizing bank run</td></tr></tbody></table></figure>To be clear, the arguments in favor of these score components are not always clear and are often debatable.&nbsp; As an example, the interconnectedness category focuses on the prospect for a bank with many connections to inflict damage on its counterparties, but, at the same time, ignores the fact that those very connections improve overall diversification and make the bank less susceptible to the stress or failure of any single counterparty.&nbsp; Regardless, the GSIB score is what it is and now we move onto recent trends in the score and how those trends demonstrate a decline rather than an increase in systemic risk.<h3>Recent Trends in the GSIB Score</h3>The chart below shows the overall increase in the weighted average GSIB score of Forum members over the past two years – from Q4 of 2019 through Q4 of 2021.&nbsp; This time period is worthy of focused consideration because it coincides with the pandemic period that has seen so many public health and economic challenges that have been met with an unprecedented government response.<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-03-28-at-2.33.15-pm.png"></figure>As shown in the chart, the weighted average GSIB score has increased by 90 score points, which equates to a 17 percent increase, in the past two years.&nbsp; This increase is material and would be expected to result in increases to GSIB surcharges for several Forum members.&nbsp; As a result, it is important to ask whether these potential increases make sense and whether they relate to an actual increase in systemic risk?&nbsp; In what follows, we briefly discuss the economics behind two of the larger drivers of the increasing GSIB score: Size and STWF.<h3>Increased Size Does Not Reflect Increased Systemic Risk</h3>Over the past two years, the entire banking system has witnessed an overall increase in the level of bank assets as a direct result of the Federal Reserve’s unprecedented monetary policy.&nbsp; Since the onset of the pandemic, the Federal Reserve has increased its balance sheet from roughly $4.2 trillion to $8.8 trillion.&nbsp; The Federal Reserve increases the size of its balance sheet by expanding the amount of bank reserves held by commercial banks. Moreover, the Fed unilaterally controls the level of bank reserves in the financial system.&nbsp; Accordingly, there is no way for the banking system to shed this extremely large build-up of reserves unless the Federal Reserve decides to reduce the size of its balance sheet.The use of the size factor as a measure of systemic risk does not make sense when the size of the entire banking system’s assets is being increased by the government – especially when the increase is so sharp and concentrated over such a short period of time.&nbsp; Moreover, during this period large bank balance sheets have become, if anything, less risky as large banks have substantially increased their holdings of bank reserves and U.S. Treasury securities – which pose little or no risk.&nbsp; The chart below shows the overall increase in Forum members’ holdings of bank reserves and U.S. Treasury securities.<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-03-28-at-2.57.50-pm.png"></figure>As shown in the chart, Forum member holdings of bank reserves and U.S Treasury securities have increased by over $1.4 trillion. This represents a massive dollar increase as well as an increase in the proportion of Forum assets held as bank reserves and U.S. Treasury securities.&nbsp; It is difficult to fathom how the Federal Reserve’s balance sheet policy that has resulted in substantially larger holdings of zero risk bank reserves and low-risk Treasury securities could possibly represent an increase in systemic risk.&nbsp; If anything, these developments have lowered systemic risks as the Federal Reserve’s policies have reduced macroeconomic risks and large banks have reduced their risks by increasing their holdings of low-risk assets.<h3>Increased STWF Does Not Reflect Increased Systemic Risk</h3>As shown previously, the magnitude of the short-term wholesale funding component of the GSIB surcharge (STWF) has increased markedly over the past two years.&nbsp; At first glance, such an increase might appear to signal an increase in systemic risks.&nbsp; But to truly assess systemic risks, we have to “look under the hood” of the STWF indicator and ask what exactly is driving the increase.&nbsp; Thankfully, researchers at the Federal Reserve and the University of Chicago have recently conducted this <a href="https://www.nber.org/system/files/working_papers/w28658/w28658.pdf">exercise</a>.&nbsp;These researchers find that, increasingly, large banks take large deposits from large financial institutions and invest them in zero risk reserves at the Federal Reserve.&nbsp; This is perhaps the safest and least systemically risky of all bank assets.&nbsp; For technical reasons, these transactions are identified as “short-term wholesale funding,” but these transactions have nothing to do with transactions in which short-term borrowings are used to fund risky assets.&nbsp; Rather, the opposite is true.&nbsp; If, for any reason, a large financial institution demanded its large deposit be returned, the bank in question would simply transfer the reserves held at the Federal Reserve to the entity seeking funds.&nbsp; No assets would need to be sold and there would be no delay in providing the needed funds.&nbsp; Accordingly, the traditional “fire-sale” dynamics that motivate the use of STWF as a systemic risk indicator are completely absent in this context.&nbsp;Rather than raise systemic risk, these transactions are actually more likely to lower systemic risk. As noted by the authors of the research paper, “global banks have become more resilient to negative wholesale funding shocks, as they can swiftly reduce their arbitrage positions in response to wholesale funding dry-ups.”&nbsp; In this important sense, the entire nature of STWF has changed in an environment in which more and more large financial institutions are relying on large banks to safely hold their deposits in the form of zero risk, liquid reserves at the Federal Reserve.<h3>Conclusion</h3>The past few years have tested all of our assumptions about how the world works.&nbsp; Our basic sense of up and down have quite understandably been challenged as we have all worked to steady ourselves in the topsy-turvy world of the past few years.&nbsp; As we continue to emerge from the ongoing challenges of the pandemic, regulators should turn to recent and anomalous developments in GSIB scores. Developments reflecting a clear decline in systemic risk should not inappropriately translate into higher capital requirements that will only serve to unnecessarily increase costs to businesses, consumers, and the economy.&nbsp;&nbsp;

Bizarro World and the GSIB Surcharge: When Up Means Down

<h3>Introduction</h3>Recently, regulators both inside and outside the U.S. have taken a keen interest in moving forward with additional changes to the large bank capital framework.&nbsp; More specifically, the FDIC recently <a href="https://www.fdic.gov/news/press-releases/2022/pr22015.html">identified</a> finalizing large bank capital reforms as a key priority and the Chair of the Basel Committee also recently <a href="https://www.bis.org/speeches/sp220208.htm">emphasized</a> the need to finalize these reforms.&nbsp; As regulators consider moving ahead with these reforms it is important to put them in an appropriate U.S. context.&nbsp; Towards that end, in this blog we, 1) review the historical development of the reforms as well as how they relate to the current capital position of large banks, 2) review the stated rationale for the reforms, 3) review the important lessons of the past few years, and 4) highlight important distinctions between the U.S. and European regulatory framework that are important to keep in mind to ensure an effective and sensible implementation of any further capital reforms in the United States.<h3>Where Are We and How Did We Get Here? Basel III and Basel III Finalization&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;</h3>The large bank capital framework is a product of international coordination.&nbsp; The Basel Committee on Banking Supervision (BCBS) – an international regulatory body comprised of bank supervisors around the globe – works to establish high-level agreements on large bank capital requirements that are then implemented at the national level by each nation’s appropriate bank regulatory authorities.&nbsp; In 2010, in the wake of the global financial crisis, the BCBS <a href="https://www.bis.org/publ/bcbs189_dec2010.pdf">published</a> an extensive set of capital reforms, known collectively as “Basel III.”&nbsp; The stated intent of these reforms was to increase both the quantity and quality of capital for large, internationally active banks.&nbsp; The Basel III reforms were implemented in the United States in 2013.Later, in 2017, the BCBS <a href="https://www.bis.org/bcbs/publ/d424.htm">published</a> a further set of revisions to the large bank capital framework.&nbsp; These additional revisions, known collectively as “Basel III Finalization” have not yet been implemented in the United States or elsewhere internationally.&nbsp; These Basel III Finalization reforms are the specific reforms that are identified by both the FDIC and the BCBS in recent speeches.Before delving into the details of Basel III Finalization, it is useful to have some context on large bank capital levels in the United States.&nbsp; In its most recent <a href="https://www.federalreserve.gov/publications/2021-november-financial-stability-report-purpose.htm">Financial Stability Report</a>, the Federal Reserve provided an analysis of large bank capital levels that we reproduce below.<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-02-25-at-2.49.23-pm.png"></figure>As the figure shows, capital levels of Forum members (Global Systemically Important Banks, or G-SIBs) have more than doubled and today stand above that of their large bank peers.&nbsp; Notably, Forum member capital ratios actually increased during the pandemic experience of the last few years.&nbsp; This point was also underscored recently by Federal Reserve Chair Jay Powell when he <a href="https://www.federalreserve.gov/newsevents/testimony/powell20220111a.htm">said</a> that “we increased capital and liquidity requirements for the largest banks—and currently, capital and liquidity levels at our largest, most systemically important banks are at multidecade highs.”Accordingly, there is simply no question that Forum members are robustly capitalized.&nbsp; Additionally, and importantly, large bank capital requirements for Forum members are significantly more robust than those of their foreign counterparts primarily because U.S. GSIBs (Forum members) are subject to a more stringent GSIB surcharge and a stress capital buffer that is not applied internationally.&nbsp; Consequently, relative to both U.S. and foreign counterparts, Forum members maintain substantial amounts of capital to ensure their safety and soundness.&nbsp;&nbsp;<h3>Why are the Basel III Finalization Reforms Necessary? Increased Risk Sensitivity, Not Increased Capital</h3>In 2017, when the BCBS issued the Basel III Finalization package, the rationale for the final reforms was made clear.&nbsp; The Chair of the BCBS indicated that a key motivation for the Basel III Finalization reforms was to “enhance[e] the robustness and risk sensitivity of the standardized approaches for credit risk and operational risk, which will make banks' capital ratios more comparable.”&nbsp; Thus, these final reforms were issued in an effort to improve the risk-sensitivity and comparability of the large bank capital framework and not to raise overall capital levels.&nbsp; Indeed, the BCBS conducted a rigorous quantitative <a href="https://www.bis.org/bcbs/publ/d426.pdf">impact study</a> to gauge the likely impact of the reforms and concluded that “the finalization of Basel&nbsp;III results in no significant increase in overall capital requirements.”Turning the clock ahead to 2022, there are clear signs that Basel III Finalization may be implemented in a manner that significantly and unnecessarily raises capital requirements across the board for large banks.&nbsp; Recently, the Federal Reserve’s outgoing vice chair for supervision <a href="https://www.federalreserve.gov/newsevents/speech/quarles20211202a.htm">indicated</a> that “implementing the remaining elements of Basel III could result in a material increase in capital levels, perhaps up to 20 percent for our largest holding companies.”&nbsp; Further, a recent study by the European Banking Authority found that implementing the Basel III Finalization reforms would increase European GSIB capital by 23 percent. This development is troubling because it suggests that Basel III Finalization could potentially be implemented in a manner counter to both the original intent and public statements about the quantitative impact of the reforms.Of course, the disparity between the recent impact studies and the original intentions of the BCBS says nothing about why the estimated impacts have come in so much higher than initially expected.&nbsp; Bank capital is a complex and technical area and changes in the economy or the banking system could be driving these impacts.&nbsp; Regardless, regulators should pay close attention to the estimated impact, assess the drivers, and ensure that any final reforms are in line with the original goal to improve risk-sensitivity and comparability without unnecessarily raising capital levels.<h3>What Does the Pandemic Say About Large Bank Capital? Leading the Way in Resilience and Supporting the Economy</h3>Some outside of the U.S. have <a href="https://www.bis.org/speeches/sp220208.htm">suggested</a> that the events of the global pandemic demonstrate a need for further capital reforms.&nbsp; However, the incontrovertible evidence from the U.S. pandemic experience, described above, clearly suggests otherwise.&nbsp; Large U.S. banks entered the pandemic with strong and robust capital levels that have only grown stronger during the course of the pandemic.In addition, during the pandemic Forum members have provided $9 trillion&nbsp;of <a href="https://fsforum.com/news/the-three-legged-stool-how-large-banks-have-supported-the-economy-during-the-pandemic">lending and financing</a> to households, communities, and businesses small and large to <a href="https://fsforum.com/our-impact/covid-19-response">support the economy</a> while strengthening their capital and liquidity positions.&nbsp;Finally, reforms that significantly and unnecessarily raise capital levels are a cause for concern because capital is not a free resource.&nbsp; As we have discussed in previous <a href="https://fsforum.com/news/capital-requirements-borrowing-costs-and-the-economy">posts</a>, continual increases in capital requirements come at a cost to households and businesses who ultimately pay more for fewer financial services, which then puts a drag on the economy.&nbsp; Given the strong and multidecade high levels of capital among the nation’s largest banks, as well as existing requirements that are more stringent than international standards, there is simply no reasonable basis for further increasing capital requirements.<h3>How Should Basel III Finalization be Approached in the U.S.? Recognizing the Unique Features of the U.S. Regulatory System&nbsp;</h3>The Basel III Finalization reforms are international in scope.&nbsp; The motivation for certain elements of these reforms relate directly to features of the non-U.S. regulatory regime.&nbsp; Motivations that may be relevant in non-U.S. contexts should not be uncritically applied to the U.S. context.One motivation that is often cited for the need to implement Basel III Finalization is the need to “<a href="https://www.bis.org/speeches/sp220208.htm">constrain the use of internally modeled approaches</a>” by banks.&nbsp; It must be recognized that this motivation is most relevant for non-U.S. banks as the ability for U.S. banks to use their own internal models (versus standardized regulator models) is severely limited.&nbsp; Specifically, U.S. banks are subject to stringent standardized capital requirements and stress tests that are fully prescribed by regulators and do not rely on bank-supplied inputs.&nbsp;Another commonly cited motivation for the Basel III Finalization reforms is the need to implement a “<a href="https://www.bis.org/speeches/sp220208.htm">risk-sensitive output floor</a>” on risk-weighted assets to ensure that capital requirements remain robust.&nbsp; This motivation also is not relevant in the U.S. context because large U.S. banks are already subject to a statutory floor on capital requirements – the Collins floor – that ensures robust capital levels for U.S. banks.&nbsp; Indeed, the Collins floor has been in effect since the passage of the Dodd-Frank Act in 2010 rendering any Basel-based floor unnecessary in the Unites States.One final motivation for the Basel III Finalization revisions is the need to establish a “<a href="https://www.bis.org/speeches/sp220208.htm">finalized leverage ratio</a>.”&nbsp; This motivation is also not relevant in the U.S. context as large banks have been subject to the enhanced supplementary leverage ratio since 2014.&nbsp; More importantly, the events of the pandemic have clearly demonstrated that the leverage ratio is not serving its intended purpose as a backstop to risk-based capital requirements and needs reconsideration.&nbsp; The Federal Reserve has <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210319a.htm">indicated</a> that it plans to seek comment on adjustments to the leverage ratio as a direct outgrowth of the pandemic experience.&nbsp; Accordingly, not only is the establishment of a “finalized leverage ratio” not necessary in the United States, but the leverage ratio we do have must be revisited.<h3>Conclusion&nbsp;&nbsp;&nbsp;</h3>Forum members support robust capital requirements to ensure a safe and sound banking system.&nbsp; Forum member capital levels are robust, at multidecade highs, and have only increased despite the enormous headwinds from the pandemic.&nbsp; Improving the risk-sensitivity of the large bank capital framework is a sensible goal, but reforms that primarily raise capital levels are unnecessary and inconsistent with the stated intent of the reforms.&nbsp; Importantly, Forum members are already subject to capital standards that go well-beyond international standards.&nbsp; Relatedly, some motivations for the Basel III Finalization reforms that are relevant outside the U.S. are not relevant in the U.S.&nbsp; Ultimately, as regulators move ahead with these reforms, there should be due consideration of how any such reforms align with their stated intent, how they fit within the U.S. regulatory context, and how they impact the U.S. economy.&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;

Basel III Finalization in the U.S. Context: Getting it Right Trumps Getting It Done

large_TiffanyHeadshot.jpg

medium_TiffanyHeadshot.jpg

small_TiffanyHeadshot.jpg

thumbnail_TiffanyHeadshot.jpg

TiffanyHeadshot.jpg

large_Screen Shot 2022-02-14 at 11.50.39 AM.png

medium_Screen Shot 2022-02-14 at 11.50.39 AM.png

small_Screen Shot 2022-02-14 at 11.50.39 AM.png

thumbnail_Screen Shot 2022-02-14 at 11.50.39 AM.png

Screen Shot 2022-02-14 at 11.50.39 AM.png

Tiffany Haas

Co-Head, Government Affairs

This week both the <a href="https://www.bis.org/bcbs/publ/d530.htm">Basel Committee on Banking Supervision</a> (BCBS) and the <a href="https://www.occ.gov/news-issuances/bulletins/2021/bulletin-2021-62.html">Office of the Comptroller of the Currency</a> (OCC) will be accepting feedback from stakeholders on recently proposed&nbsp; principles for the management and supervision of climate-related financial risks.&nbsp; The eight U.S. global systemically important banks – all Forum members -- are deeply engaged in this topic and have provided feedback through the Forum on both the <a href="https://fsforum.com/a/media/fsf---bcbs-climate-risk-principles-comment-letter.pdf">BCBS</a> and <a href="https://fsforum.com/a/media/fsf---occ-climate-principles-comment-letter.pdf">OCC</a> proposals.&nbsp; These firms are required to have extremely robust risk management frameworks that account for all material risks.&nbsp; The official sector’s new and recent focus on climate-related financial risks presents an important opportunity to establish durable and effective guidance from reasonable first principles that fit within the scope of existing risk management practices.&nbsp; Accordingly, we think it is important and helpful to lay out a few key principles that will promote final principles on climate-related financial risks that is efficient, effective, and well-integrated with existing risk management frameworks.Climate principles should be risk-based and flexible.&nbsp; The Forum supports high-level principles that enable banks to flexibly incorporate climate-related financial risks into their existing risk management frameworks.&nbsp; Large banks, by necessity, are devoted to ongoing and holistic risk management. It is crucial that new or evolving risks be managed within the existing framework to ensure that risk management is effective and efficient.&nbsp; Building a new and untested set of processes for each and every new risk that comes to light would result in an overwrought system ill-suited to its task, and could lead to insufficient management of the most significant risks.&nbsp; In addition, we support a risk-based approach that considers the unique characteristics of each bank and allows banks to focus on targeting material climate-related financial risks, which are likely to vary significantly across the banking sector.&nbsp;Climate principles should use scenario analysis rather than traditional stress testing or capital charges.&nbsp; The Forum supports the use of scenario analysis to explore the potential impact of climate-related financial risks.&nbsp; Scenario analysis should focus on material exposures and incorporate plausible climate scenarios.&nbsp; Scenario analysis should be clearly distinguished from traditional stress tests or capital charges.&nbsp; As we have discussed <a href="https://fsforum.com/news/first-things-first-climate-risk-management-and-capital-for-large-banks">previously</a>, the time horizon over which climate-related risks may materialize is likely far longer than that required for capital planning.&nbsp; Additionally, the state of knowledge on climate-related risk assessment is in its earliest stages.&nbsp; The nascent state of our understanding, as well as important limitations in both climate data and modeling would make any capital requirements premature – a sentiment <a href="https://www.bloomberg.com/news/articles/2022-02-02/yellen-says-higher-bank-capital-rules-for-climate-premature#:~:text=Treasury%20Secretary%20Janet%20Yellen%20said,an%20interview%20with%20Bloomberg%20News.">shared</a> by Treasury Secretary Janet Yellen.&nbsp; Scenario analysis, however, can be used flexibly to continually assess climate-related risk exposures and can improve over time as data, methods, and our understanding of climate-related financial risks improve.Scenario analysis should make use of time horizons that align with broader risk management goals.&nbsp; The time horizon employed for scenario analysis is a key parameter that determines its usefulness for risk management.&nbsp; The time horizon used in scenario analysis should be consistent with current approaches to risk management in order to facilitate incorporating climate-related financial risks into existing practices.&nbsp; Moreover, while it may be sensible to consider climate-related financial risks over a somewhat longer time horizon, extraordinarily long horizons, such as 30 years, that do not relate to ongoing risk management or business planning would not support effective and holistic risk management.Scenarios should be plausible.&nbsp; Climate scenarios may be severe and rigorous but should also be credible.&nbsp; Scenarios keyed to tail risks that are too remote may result in risk measurements that are not highly relevant or actionable.&nbsp; Overall, the degree of severity in any climate scenario must be appropriately balanced against its plausibility.&nbsp; This balance should be made explicit in a well-articulated and measurable standard to ensure that climate scenarios, and in particular transition risk scenarios, are empirically relevant and have the potential to result in actionable outcomes.&nbsp; Transition risks are inherently more difficult to assess because they often depend on the path of government policy and different assumptions about the specific type and trajectory of policy can lead to widely varying outcomes.&nbsp; Transition risks may also incorporate market, technology and innovation risks further complicating its analysis.&nbsp; Accordingly, transition risk scenarios should be clear, comprehensive and credible. &nbsp;&nbsp;Climate principles should take a phased approach.&nbsp; Unlike traditional financial risks such as credit risk or interest rate risk, climate-related financial risks are not well-established or understood.&nbsp; The data, models, and methods for assessing these risks are emerging rapidly.&nbsp; Accordingly, regulators should establish principles that aim to be “future proof” by explicitly allowing for growth and innovation and guard against getting locked into approaches that are viable in the present but will soon be outmoded.The Forum and its members welcome the public dialogue on climate-related financial risks and we look forward to increased engagement as other regulators engage on this issue.&nbsp; As we move forward on assessing the importance of climate-related financial risks and appropriate risk management practices we should endeavor to ensure that expectations of banks fit within a broader risk management framework, address plausible scenarios and remain distinct from near-term capital requirements.&nbsp; &nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;

Focus on the Big Picture:  Addressing Climate-Related Financial Risks Within the Overall Risk-Management Framework

<h3>Introduction</h3>Climate change is garnering considerable attention from financial policymakers.&nbsp; As an example, the Financial Stability Oversight Council (FSOC) recently released a <a href="https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf">report</a> on climate-related financial risk.&nbsp; Additionally, the Basel Committee on Banking Supervision (BCBS) recently released <a href="https://www.bis.org/press/p211116.htm">principles</a> on the management and supervision of climate-related financial risks. Increasingly, many policymakers are focused on the need for large banks to improve and demonstrate their methods of addressing climate-related financial risks. Consequently, it is important to consider the type and nature of climate-related financial risks borne by large banks.&nbsp; In this post, we review some recent data and analysis that are informative on the nature of climate-related financial risks for large banks.&nbsp; The data suggest that large banks are less exposed to climate-related financial risk than the banking sector as a whole, and may, in fact, perform well in response to some forms of climate risk as a result of increased lending activity.&nbsp; These data are not the last word on climate-related financial risk for large banks, but they are relevant and should be carefully considered as policymakers consider the management of climate-related financial risks by large banks.<h3>Evidence from European Banks</h3>The European Central Bank (ECB) recently undertook an <a href="https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op281~05a7735b1c.en.pdf">analysis</a> to assess the impact of climate change on financial risk using data from 1,600 European banking groups of varying sizes.&nbsp; The analysis was conducted by ECB staff using granular, bank exposure data, and the ECB’s models and assumptions regarding how climate change influences risk.One noteworthy analysis models the impact of transitioning to a “hothouse world” on the credit risk –or average default probability – in bank lending portfolios.&nbsp; The “hothouse world” is a specific climate scenario provided by the Network for Greening the Financial System (<a href="https://www.ngfs.net/sites/default/files/medias/documents/820184_ngfs_scenarios_final_version_v6.pdf">NGFS</a>) – a group of global central banks working on the development of environment and climate risk management in the financial system.&nbsp; This scenario represents an extreme worsening of climate change in which global temperatures increase by 3 degrees Celsius by 2080 and GDP falls by as much as 22 percent over the same period.&nbsp;The ECB analysis considers the average default rate in bank lending portfolios under both a less drastic “orderly transition” and the hothouse world.&nbsp; The increase in average default probability between the orderly transition and hothouse world scenarios measures the impact of climate-related financial risk on each bank’s lending portfolio. The results of this analysis are contained in the Figure presented below from the ECB report.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2021-12-13-at-10.20.11-am.png"></figure>&nbsp;Each dot in the figure represents a specific bank’s loan portfolio.&nbsp; The size of the dot represents the size of the bank’s exposure with larger dots representing larger banks with larger loan portfolios.&nbsp; The red dots represent European Global Systemically Important Banks (GSIBs).&nbsp; European GSIBs are most directly comparable to U.S. GSIBs (all of which are FSF members).&nbsp; The blue and yellow dots represent small and mid-sized European banks. The dotted line in the figure represents the 45-degree line.&nbsp; Any dot that lies on the 45-degree line represents a case in which the bank’s average default probability is the same under both the orderly transition and hothouse scenarios.&nbsp; A dot that lies below the 45-degree line represents a case in which the bank’s average default probability increases in the hothouse world scenario, which suggests that a worsening climate poses an increased financial risk to that institution.The data in the figure reveal a few interesting characteristics about large bank loan portfolios and the impact of a worsening climate on large bank financial risks.&nbsp; First, European GSIBs display average default probabilities that are generally below average and present less financial risk in both scenarios.&nbsp; This can be seen by noting that the red dots are clustered to the left and below the solid lines labeled “Average.”&nbsp; Second, the European GSIB data are relatively close to the 45-degree line suggesting that any increase in default probabilities in the hothouse scenario is small.&nbsp; Third, to the extent that some banks exhibit a noticeable increase in default probability in the hothouse scenario – indicated by a dot that lies well below the 45-degree line – these banks are of smaller size and systemic importance within Europe (the blue dots).Overall, these data suggest that large European GSIBs maintain loan portfolios that are relatively low risk and are not subject to significant amounts of climate-related financial risk.&nbsp; Some smaller and mid-sized banks, however, do exhibit noticeable increases in default risk resulting from the hothouse scenario.&nbsp; While we cannot assert that the experience of European GSIBs will translate directly to U.S. GSIBs, large banks share some common characteristics, such as broad and diversified lines of business and significant capital markets activities, that may suggest at least a degree of commonality in the impact of climate risk on default probabilities. &nbsp;&nbsp;<h3>Evidence from U.S. Banks</h3>As discussed, the European experience may not directly translate to U.S. banks.&nbsp; However, some recent <a href="https://www.newyorkfed.org/research/staff_reports/sr990">research</a> from economists at MIT and the Federal Reserve Bank of New York examines the potential impact of climate risks on U.S. banks.&nbsp; This research examines the impact of weather disasters such as hurricanes and floods on bank capital and performance.&nbsp;The authors find, over the 1995-2018 period, that extreme weather events have no discernible negative impact on bank capital or performance.&nbsp; As stated by the authors, “[w]hen we consider all FEMA disasters, we find generally insignificant or small effects on bank performance and stability.”&nbsp; Additionally, the researchers also find that larger banks tend to exhibit stronger performance following a severe weather event because of the high volume of subsequent lending activity. Interestingly, the authors argue that larger banks respond by increasing lending following a weather event because they have access to deposits in affected and unaffected areas and can effectively channel resources from locations with surplus savings to locations that need to borrow funds to recover from a weather event.&nbsp; Accordingly, large banks’ geographically diversified funding model is beneficial to both themselves and the communities that they serve.Finally, in considering why large banks may be well positioned to address climate risks, it is useful to consider the kinds of assets that are most likely exposed to climate risk and their concentration in large bank asset portfolios.&nbsp; Climate events such as rising sea levels, hurricanes, and floods are most likely to impact real estate assets such as hotels, commercial buildings, and homes.&nbsp; As a result, banks with large concentrations in real estate-backed loans are more likely to be exposed to climate-related financial risks.&nbsp; The table below shows the fraction of bank assets invested in real estate-backed loans for banks in different size categories.<figure class="table"><table style="border-bottom:none;border-left:none;border-right:none;border-top:none;"><tbody><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:1pt solid windowtext;padding:0in 5.4pt;vertical-align:top;width:467.5pt;" colspan="7">&nbsp;&nbsp;Real Estate Lending as a Percentage of Total Assets by Bank Size&nbsp;&nbsp;</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:66.75pt;">&nbsp;Total Assets ($BN)</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:66.75pt;">&nbsp;U.S. GSIB</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:66.8pt;">&nbsp;250+</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:66.8pt;">&nbsp;100-250</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:66.8pt;">&nbsp;50-100</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:66.8pt;">&nbsp;10-50</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:66.8pt;">&nbsp;&lt; 10&nbsp;</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:66.75pt;">Real Estate Lending / Assets (%)</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:66.75pt;">&nbsp;13.0</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:66.8pt;">&nbsp;16.6</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:66.8pt;">&nbsp;19.6</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:66.8pt;">&nbsp;28.4</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:66.8pt;">&nbsp;29.6</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:66.8pt;">&nbsp;53.0&nbsp;</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:467.5pt;" colspan="7">Data available from 09/30/2021 Call Report <a href="https://cdr.ffiec.gov/public/PWS/DownloadBulkData.aspx">https://cdr.ffiec.gov/public/PWS/DownloadBulkData.aspx</a></td></tr></tbody></table></figure>As shown in the table, U.S. GSIBs allocate 13 percent of their asset portfolios to real estate-backed loans.&nbsp; Banks with less than $10 billion in assets allocate an average of 53 percent of their assets to real-estate backed loans.&nbsp; The table clearly shows that the proportion of bank assets invested in real estate-backed loans increases smoothly as bank size decreases.&nbsp; Accordingly, larger banks do not exhibit a concentration in real estate that would naturally lend itself to climate-related financial risks.&nbsp;&nbsp;&nbsp;<h3>Conclusion</h3>Climate change and its impact on our environment and economy is an important public policy issue that deserves careful consideration.&nbsp; Existing data and research suggest that large banks are better positioned to deal with climate change than the sector as a whole.&nbsp; At the same time, large banks are actively assessing these risks and taking necessary steps to manage and mitigate climate-related financial risk.&nbsp; Accordingly, as policymakers consider the role that large banks should play in addressing climate-related financial risk, they should carefully assess the type and significance of climate-related financial risks borne by large banks.&nbsp; A balanced and data-based approach to addressing climate-related financial risks will best ensure that we maintain a robust, safe, and sound banking system.&nbsp;&nbsp;

Climate Risk and Large Banks: What Do the Data Say?

thumbnail_gs_logo_final.png

gs_logo_final.png

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.

small_solomon_david.jpg

thumbnail_solomon_david.jpg

solomon_david.jpg

David Solomon

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

thumbnail_statestreet_logo_final.png

statestreet_logo_final.png

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.

small_ron_ohanley.jpg

thumbnail_ron_ohanley.jpg

ron_ohanley.jpg

Ronald O'Hanley

State Street Corporation Chairman And Chief Executive Officer, Forum Vice Chairman

thumbnail_bofa_logo_final.png

bofa_logo_final.png

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.

small_brian_moynihan.jpg

thumbnail_brian_moynihan.jpg

brian_moynihan.jpg

Brian Moynihan

Bank Of America Chairman Of The Board And Chief Executive Officer

thumbnail_bnym_logo_final.png

bnym_logo_final.png

BNY Mellon

Todd Gibbons currently serves as the Chief Executive Officer of BNY Mellon. Prior to that, Todd had been a Vice Chairman of BNY Mellon and CEO of Clearing, Markets and Client Management. In that role he oversaw the Pershing clearing business; the trading, financing, collateral and liquidity management solutions delivered through the Markets business; treasury services and commercial payment activities; the U.S. government securities clearance and U.S. tri-party repo businesses delivered through BNY Mellon Government Securities Services Corp; credit services; global client management; and regional area management. From 2008 through 2017, he served as CFO. Previously, for six years he was Chief Risk Policy Officer, overseeing credit, operational and market risk management of the company and The Bank of New York.

Todd also served as CFO of The Bank of New York for almost a year prior to the merger. He first joined The Bank of New York in 1986 and held top management positions in the capital markets business, including head of global treasury, with responsibility for asset and liability management, funding, money market trading, swaps and derivative products. Prior to joining The Bank of New York, he was assistant treasurer at Handy and Harman, a leading refiner, processor and fabricator of precious metals.

Todd is a member of BNY Mellon’s Executive Committee. He also serves on the advisory board of Wake Forest University’s Business School. He holds a B.S. in Business Administration from Wake Forest University and an MBA from Pace University.

small_todd-gibbons.jpg

thumbnail_todd-gibbons.jpg

todd-gibbons.jpg

Thomas Gibbons

BNY Mellon Chief Executive Officer

thumbnail_citi_logo_final.png

citi_logo_final.png

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.

small_fraser.jpg

thumbnail_fraser.jpg

fraser.jpg

Jane Fraser

Citigroup Chief Executive Officer

thumbnail_JPMC_logo-final.png

JPMC_logo-final.png

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.

small_jamie_dimon.jpg

thumbnail_jamie_dimon.jpg

jamie_dimon.jpg

Jamie Dimon

JPMorgan Chase & Co. Chairman And Chief Executive Officer

thumbnail_MS_logo_final.png

MS_logo_final.png

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.

small_james_gorman.jpg

thumbnail_james_gorman.jpg

james_gorman.jpg

James Gorman

Morgan Stanley Chairman And Chief Executive Officer

thumbnail_wf_logo_final.png

wf_logo_final.png

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.

BankNotes Blog

Sign Up for Updates