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Sean Campbell

Chief Economist, Head of Policy Research

<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;

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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 Risk and Large Banks: What Do the Data Say?

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Kevin Fromer

President and Chief Executive Officer

Last week, the Federal Reserve released its Fall 2021 <a href="https://www.federalreserve.gov/publications/files/financial-stability-report-20211108.pdf">Financial Stability Report</a>.&nbsp;The report does an excellent job of highlighting how banks, and Forum members in particular, have actively contributed to U.S. financial stability.Specifically, the report finds that “banks continued to be profitable and strongly capitalized.”&nbsp;This is an important statement about the condition of the banking sector.&nbsp;But it is particularly important with respect to the largest institutions, specifically Forum members, whose diversified nature is a source of strength.&nbsp;Forum members serve the economy and their customers in a variety of ways depending on the needs of individual customers, companies and other financial institutions.&nbsp;For example, the report notes the significance of capital markets activity during the pandemic – such as underwriting – which has supported industries looking to raise capital and the provision of liquidity to financial markets, both of which directly support the economy.&nbsp;This activity and an improving economy drove performance that enhanced the strength of banks and supported overall financial stability.&nbsp;In effect, consistent and robust profitability is a source of safety and soundness.In terms of overall capital levels, the report clearly documents the strong capital position of Forum members, all global systemically important banks (GSIBs).&nbsp;The chart below, taken directly from the report, clearly shows that current capital levels exceed pre-pandemic levels and also exceed those of large, non-GSIB peer banks.&nbsp;The higher capital levels of Forum members speak directly to the fact that they are subject to the most stringent regulatory capital standards.&nbsp;<figure class="image image-style-align-center"><img src="https://fsforum.com/a/media/screen-shot-2021-11-16-at-4.11.41-pm.png"><figcaption>Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding Companies</figcaption></figure>&nbsp;The report also documents the high degree of liquidity maintained by Forum members.&nbsp;The chart below, taken from the report, documents the high level of liquidity on Forum member balance sheets relative to other banks. The data clearly show that Forum members maintain the highest proportion of liquid assets, which supports their resiliency as liquid assets can be quickly and easily monetized in times of stress.&nbsp;<figure class="image image-style-align-center image_resized" style="width:75%;"><img src="https://fsforum.com/a/media/screen-shot-2021-11-16-at-4.13.21-pm.png"><figcaption>Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding Companies</figcaption></figure>&nbsp;Notably, the recent Financial Stability Report identifies several near-term financial stability risks worth monitoring, such as increased leverage at certain non-banks, the prospects for sustained inflation, and a worsening of the public health situation. Importantly, the banking sector has acted as a source of strength and resiliency that contributes to financial stability.&nbsp;Forum members will continue to responsibly support the strength of our financial system and the overall economy.

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

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


Capital and Financial Stability

Federal Reserve Financial Stability Report Underscores How Forum Members Support Financial Stability

<h3>Introduction</h3>A key priority of regulators in the U.S. and Europe is the implementation of the <a href="https://www.bis.org/bcbs/publ/d424.htm">Basel III Finalization</a> (B3F) framework, which makes a variety of adjustments to the original <a href="https://www.bis.org/publ/bcbs189.htm">Basel III</a> package that was adopted a decade ago.&nbsp; Recently, Europe has issued a proposal on how Basel III Finalization would be implemented in Europe and U.S. regulators are expected to issue their own proposal in the near future.&nbsp; The Basel III Finalization framework – as agreed to internationally -- has important implications for certain smaller, private companies that rely on bank lending to finance their investments and do not finance their investment by issuing publicly traded debt and equity securities. Under the framework, U.S. banks lending to these smaller, private companies would be subject to higher capital requirements than larger corporations that issue publicly traded securities.&nbsp; This is problematic because overall creditworthiness is not fundamentally related to whether a company issues securities and firms that do not issue securities to finance their investment are fundamentally more reliant on bank financing.&nbsp; As a result, this new capital rule could unnecessarily limit bank credit for precisely those creditworthy companies that are in the greatest need of bank financing.&nbsp; In this post, we describe the issue, dimension the size of the problem, and discuss important features of the recent European proposal, which suggest a potential approach for ensuring that credit is not unnecessarily restricted from creditworthy companies in the United States.<h3>Bank Credit to Corporate Borrowers: The Current Regime</h3>In the United States, banks that make corporate loans are required to apply a risk weight of 100 percent under standardized capital rules.&nbsp; This means that if a bank has a capital requirement of, say, 12 percent, then the bank must maintain an additional $12 for every $100 in lending that it provides to a corporate borrower regardless of its creditworthiness.&nbsp; Accordingly, a company that has been in operation for 10 years and has borrowed and paid back several bank loans is treated identically to a new, start-up company that has little experience and has never taken out and repaid a bank loan.&nbsp; This approach to capitalizing bank lending to corporates is problematic because it lacks any risk sensitivity – a bank should not need to maintain as much capital to support a loan to a highly creditworthy corporate borrower as it does to a newer and less creditworthy borrower.&nbsp; Ultimately, the lack in risk sensitivity means that more creditworthy borrowers pay higher loan rates and receive less credit than they should based on fundamental credit risk.&nbsp; In Europe, banks are permitted to recognize more creditworthy borrowers through the use of public credit ratings, but that approach is prohibited in the United States due to a provision of the Dodd-Frank Act that prohibits the use of credit ratings in U.S. bank regulation.<h3>Brighter Days Ahead for Corporate Borrowers?</h3>The lack of risk sensitivity in capital requirements for corporate lending is well known by regulators.&nbsp;&nbsp; In the past few years, regulators have attempted to address this problem.&nbsp; More specifically, the Basel III Finalization framework allows banks to identify sufficiently creditworthy borrowers as “investment grade.”&nbsp; A borrower that is investment grade should, according to the bank’s credit analysis, have the financial wherewithal to repay a loan and make all required interest payments with a high degree of certainty.&nbsp; These investment grade – or IG – borrowers would then be subject to a 65 percent risk weight.&nbsp; As a result, if a bank is required to maintain 12 percent capital on a loan to a riskier start up, then a loan to a safer IG borrower would only require roughly 8 percent capital.&nbsp; The resulting lower capital requirement would then allow the bank to extend credit to the IG borrower at a lower and more affordable interest rate.Unfortunately, the story does not end here.&nbsp; The same B3F proposal only allows a bank to identify a corporate borrower as IG if the borrower issues securities, such as equity, that are publicly traded.&nbsp; This provision of the proposal is highly problematic because a large number of creditworthy companies that borrow from banks do not issue publicly traded securities.&nbsp; Additionally, over the past twenty years, there has been a growing trend for firms to remain private and not issue public securities for a variety of reasons related to maintaining corporate control and the regulatory burdens associated with going public.&nbsp; Accordingly, a very large number of creditworthy borrowers would be restricted from this risk-sensitive capital treatment, which undercuts the entire motivation for establishing the IG designation in the first place.&nbsp;<h3>How Problematic is the Public Securities Requirement?</h3>Recent <a href="https://www.nber.org/system/files/working_papers/w28685/w28685.pdf">research</a> from the Federal Reserve Board and the University of Maryland can be used to assess the costs associated with requiring corporate borrowers to be issuers of publicly traded securities in order to be considered IG.&nbsp; Specifically, these researchers use confidential regulatory data from 39 large U.S. banks to measure the number and type of firms that benefit from bank lending.&nbsp; The researchers also identify which firms are issuers of publicly traded securities and which aren’t.&nbsp; Table 1 below shows some select data characteristics from their research.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2021-11-09-at-4.45.33-pm.png"><figcaption>Source: Caglio, Darst, Kalemli-Ozcan (2021)</figcaption></figure>&nbsp;The first row of Table 1 shows that there are over 150,000 private firms that borrow from large banks while there are only roughly 3,200 public firms that borrow from banks.&nbsp; Accordingly, the requirements that a firm be an issuer of publicly traded securities would make it impossible for over 150,000 companies to be considered investment grade regardless of their credit quality or borrowing experience.&nbsp; The data in Table 1 also show that private firms are generally much smaller than public firms with a median asset value of only $13 million versus $1.9 billion for public firms.&nbsp; As a result, restricting the IG designation to public firms would disadvantage smaller businesses.&nbsp; Finally, the last row of Table 1 shows the fraction of firm assets financed with liabilities such as bank debt.&nbsp; Private firms generally carry slightly more debt than public firms – in large part because public firms are able to tap public equity markets.&nbsp; In this sense, limiting the IG designation is especially problematic because it disadvantages those firms that are more dependent on borrowing, and bank borrowing in particular, to finance their investment and growth.&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;It may not be the case that all 152,409 private firms identified in Table 1 would meet the investment grade standard.&nbsp; At the same time, if even a modest fraction of private firms are fundamentally creditworthy, then limiting the IG designation solely to public firms would unnecessarily limit credit to thousands of deserving companies that are important to supporting the U.S. economy.&nbsp;<h3>Looking to the Europeans for a Path Forward&nbsp;</h3>Recently, Europe took a step toward codifying the Basel III Finalization framework into a national rule.&nbsp; As discussed above, in Europe banks are allowed to use credit ratings to effectively determine which corporate borrowers are creditworthy and subject to a less-than 100 percent risk weight.&nbsp; Under the B3F framework, a company without a credit rating would also not be eligible for this more risk-sensitive treatment, which is itself problematic and similar to the requirement for a company to issue publicly traded securities.The recent <a href="https://ec.europa.eu/finance/docs/law/211027-proposal-crr-2_en.pdf">European proposal</a>, however, recognizes the problematic restriction to companies with a credit rating and the impact it would have on smaller, unrated companies in need of bank credit.&nbsp; In response, the European proposal sets up a multi-year transitional arrangement that allows unrated corporates that are sufficiently creditworthy to be eligible for an investment grade rating and a 65 percent risk weight.&nbsp; The transitional arrangement clearly states that to be eligible for the 65 percent risk weight there is no requirement that the company either have a credit rating or issue publicly traded securities.&nbsp; Further, the proposal empowers the European Banking Authority to monitor the use of the transitional arrangement and inform the European Parliament on its use so that it can consider a legislative proposal to deal with the treatment of unrated corporate borrowers.The approach taken in the European proposal is sensible and clearly recognizes the negative consequences of unnecessarily restricting credit from creditworthy borrowers for reasons unrelated to their credit risk.&nbsp; As the U.S. moves forward with its proposal, regulators should consider the European proposal and how to ensure that bank credit is not unnecessarily restricted for creditworthy corporate borrowers.<h3>Conclusion</h3>The ability of creditworthy companies to obtain bank credit is important for the growth of the U.S. economy.&nbsp; The current B3F proposal to recognize more creditworthy borrowers would limit the application to only those companies that issue publicly traded securities.&nbsp; Data from the Federal Reserve show that this would restrict over 150,000 companies from being considered investment grade, limiting their ability to access bank credit at reasonable cost.&nbsp; More importantly, this restriction would impact those companies that are generally smaller, and rely more heavily on bank credit.&nbsp; Recently, the Europeans have put forward a proposal that addresses this problem. U.S. regulators should consider the European proposal as they move forward to ensure that credit is not unnecessarily restricted for creditworthy companies that contribute so much to the U.S. economy.

Capital Regulation May Unnecessarily Restrict Bank Credit for Creditworthy Businesses

<h3>Introduction</h3>Over the past 1-1/2 years, large banks have seen a massive increase in their <a href="https://fsforum.com/news/surging-deposits-and-gsib-surcharges-capital-regulation-risks-undermining-economic-recovery">deposits</a> and overall balance sheets as outstanding Federal Reserve balances at banks have more than doubled as a result of the pandemic and related government actions to support the economy.&nbsp; As a result of this balance sheet expansion, the risk-insensitive supplementary leverage ratio (SLR) capital requirement has become more binding and now requires more capital in the aggregate than risk-based capital requirements for Forum members.&nbsp; In this blog, we document the increasingly binding nature of leverage capital requirements, outline the problematic nature of a binding leverage requirement, and discuss the prospects for restoring risk-based rather than leverage capital as the binding capital constraint for large banks.<h3>Leverage and Risk-Based Capital Requirements: Moving from the Backstop to the Frontstop</h3>Financial Services Forum members are subject to both leverage capital and risk-based capital requirements.&nbsp; Forum members must maintain enough Tier 1 capital to yield an SLR of 5 percent.&nbsp; The SLR is a risk-insensitive capital requirement that effectively requires a bank to maintain the same amount of capital for every asset on its balance sheet whether it be cash, a U.S. Treasury bond, or a corporate loan. In addition, Forum members must also maintain a risk-based capital requirement of 6 percent of Tier 1 capital, plus a stress capital buffer that ranges from 2.5 percent to 6.4 percent, plus a GSIB surcharge buffer that varies between 1 percent and 3.5 percent.&nbsp; Risk-based capital requires a different amount of capital for each asset based on its risk profile.&nbsp; Accordingly, a U.S. Treasury bond requires less capital than a corporate loan.&nbsp; Ultimately, a bank must maintain enough capital to satisfy whichever requirement results in a greater dollar amount of capital.Figure 1 shows the difference between the aggregate amount of Tier 1 capital required by risk-based and leverage capital requirements from 2020Q1 through 2021Q3 for Forum members.&nbsp; We omit quarters over which the Federal Reserve excluded reserves and U.S. Treasuries from the SLR so that the amounts can be meaningfully compared.&nbsp; As can be seen in Figure 1, in the first quarter of 2020 (the very beginning of the pandemic), the amount of Tier 1 capital required by risk-based capital requirements was roughly $40 billion more than the amount required by the SLR (the blue bar in Figure 1 is positive $40 billion).&nbsp; As a result, risk-based capital was the binding capital constraint, which means that decisions to allocate funding to lending and other activities would be made based on their risk profile, which incentivizes sound risk management and supports overall safety and soundness.&nbsp;More recent data, however, clearly show that the risk-insensitive SLR is requiring more capital in the aggregate than risk-based requirements.&nbsp; Specifically, the red bars in Figure 1 from the most recent two quarters are negative, which shows that the SLR is requiring more capital than the risk-based requirement.&nbsp; And the most recent data from the third quarter of 2021 show an increase in the amount of capital required by the SLR relative to risk-based requirements (as the bar associated with Q3 2021 in Figure 1 is more negative).&nbsp; The increase in SLR capital is driven by the continued increase in bank balance sheets as the Federal Reserve has continued its accommodative monetary policy, such as asset purchases, leading to an expansion in bank balance sheets and increased leverage requirements relative to risk-based counterparts.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2021-11-04-at-12.04.14-pm.png"><figcaption>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Source: Federal Reserve Board, Bank Earnings Releases</figcaption></figure><h3>The Importance of Keeping Leverage Requirements in the Background</h3>Regulators have long recognized that risk-insensitive leverage requirements should serve as a backstop to risk-based requirements and that risk-based requirements should serve as the binding capital requirement.&nbsp; As previously <a href="https://www.federalreserve.gov/newsevents/speech/powell20170623a.htm">stated</a> by the chairman of the Federal Reserve, Jerome Powell: “A risk-insensitive leverage ratio can be a useful backstop to risk-based capital requirements.&nbsp; But such a ratio can have perverse incentives if it is the binding capital requirement because it treats relatively safe activities, such as central clearing, as equivalent to the most risky activities.”&nbsp; Accordingly, as the SLR becomes more binding, large bank incentives become more distorted and bank funding decisions become increasingly disconnected from risk and soundness considerations.The view that leverage requirements should not be the binding capital constraint is founded on well-established economic thinking and research.&nbsp; Specifically, economists such as Stanford’s Darrell Duffie have <a href="https://www.forbes.com/sites/lbsbusinessstrategyreview/2016/03/11/why-are-big-banks-offering-less-liquidity-to-bond-markets/?sh=267cb9e629de">shown</a> how binding leverage requirements reduce incentives to engage in low-risk activities, such as intermediating U.S. Treasury markets.&nbsp; Further, Harvard’s Jeremy Stein, a former governor of the Federal Reserve, has <a href="https://scholar.harvard.edu/files/stein/files/greenwoodtextfa17bpea_002.pdf">pointed out</a> how binding leverage requirements reduce heterogeneity among banks, which creates greater concentration and reduces diversification in the banking industry.&nbsp; As a result, the increasingly binding nature of leverage capital requirements documented in Figure 1 is a cause for concern because of the perverse effects of a binding leverage constraint.<h3>Restoring Leverage to the Background: The Path Ahead</h3>At the beginning of the pandemic, the Federal Reserve <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200515a.htm">acted</a> quickly to exclude holdings of cash and U.S. Treasuries from the SLR calculation.&nbsp; This act was fully appropriate because neither cash nor U.S. Treasuries contribute any significant risk to a bank’s balance sheet.&nbsp; Both cash and Treasuries are low-risk assets that provide banks with an important source of liquidity.&nbsp; In March 2021, the Federal Reserve <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210319a.htm">ended</a> these exclusions, but also indicated that they would “soon be inviting public comment on several potential SLR modifications.”The data presented in Figure 1 clearly demonstrate that the time has come to modify the SLR.&nbsp; Importantly, holdings of low-risk assets that do not meaningfully contribute to risk should not require significant amounts of capital.&nbsp; The simple and transparent approach of excluding these holdings from the SLR calculation, as previously adopted by the Federal Reserve, achieves this result and would go a long way toward ensuring that leverage requirements act as a backstop and not the binding capital constraint.Some have argued that any change to the SLR must be “capital neutral,” which generally means that the total amount of capital required from large banks should not decrease.&nbsp; Such an approach is problematic precisely because the SLR has become too binding and has leaped in front of risk-based requirements.&nbsp; A change to the SLR that removes cash and Treasury exposures and then “adds back” some arbitrary amount simply reestablishes the problem that needs to be solved: leverage capital requirements are too binding.&nbsp; Other complicated schemes that have been floated, such as excluding some but not all cash and Treasury holdings, suffer from the same problem while increasing the complexity of the capital framework. Ultimately, the appropriate amount of capital for large banks should be fully determined by risk-based requirements. Currently, bank regulators are considering a significant recalibration of risk-based requirements through the <a href="https://www.bis.org/bcbs/publ/d424.htm">Basel III Finalization</a> process.&nbsp; Rather than focusing on leverage requirements, regulators should simply and quickly restore leverage requirements to the background and move on to updating risk-based requirements.&nbsp; Such an approach would restore appropriate incentives while ensuring the primacy and relevance of risk-based requirements. &nbsp;&nbsp;&nbsp;<h3>Conclusion</h3>Regulators have long recognized that leverage requirements should serve as a backstop and not the binding capital requirement for large banks.&nbsp; The events of the pandemic have created a situation in which leverage requirements are having an outsized influence on large bank capital requirements.&nbsp; Binding leverage capital requirements result in distorted incentives that are highly problematic for the efficient allocation of resources in the economy.&nbsp; The Federal Reserve should modify the SLR to ensure that it remains in the background and does not serve as the binding capital constraint.&nbsp; Regulators can also ensure the appropriateness of risk-based requirements by moving ahead to update them through the Basel III Finalization process.&nbsp; Doing so would place appropriate emphasis on risk-based, rather than risk-insensitive, capital requirements.&nbsp; &nbsp;

From Backstop to Frontstop: The Leverage Ratio is Becoming the Binding Capital Constraint

<h3>Introduction</h3>A key feature of the post-crisis regulatory regime is the “buffer” framework.&nbsp; A buffer is, technically speaking, not a strict regulatory requirement, but a strong “suggestion.”&nbsp; In the case of capital buffers, banks are, in theory, allowed to maintain capital levels that are above the minimum requirement but below the level of the minimum plus buffers.&nbsp; Regulators have included buffers in the regulatory framework to incentivize banks to “use their buffers” during downturns so that credit is not sharply curtailed, further exacerbating a downturn.&nbsp; As pointed out by <a href="https://www.federalreserve.gov/econres/feds/files/2021024pap.pdf">research</a> from the Federal Reserve, the COVID experience shows that these buffers did not work as intended during the pandemic.&nbsp; That is because the use of buffers by banks is largely seen as a signal of weakness by market participants, a signal that could impair a bank’s ability to maintain funding from its shareholders and creditors.&nbsp; Because of these incentives, buffers cannot be used flexibly and should be regarded as just another component of “minimum requirements.”&nbsp; In the remainder of this post, we discuss the large bank buffer regime, the experience with buffers during COVID, the underlying problem with the buffer framework, and implications for the countercyclical capital buffer.<h3>Buffers, Buffers, Everywhere – The Large Bank Regulatory Regime&nbsp;</h3>Financial Services Forum members are required to maintain a minimum amount of Tier 1 common equity capital (“capital”) as a ratio of total risk-weighted assets.&nbsp; This minimum requirement is 4.5 percent.&nbsp; A bank that maintains less than a 4.5 percent Tier 1 common equity ratio is in breach of its minimum requirement and would be subject to severe supervisory repercussions.&nbsp; On top of this minimum requirement, Financial Services Forum members are subject to three additional capital buffers as depicted in Table 1.&nbsp; One buffer is the GSIB capital surcharge buffer (GSIB), which averages 2.7 percent among Forum members.&nbsp; Another buffer is the stress capital buffer (SCB), which averages 3.5 percent among Forum members, and the third and final buffer is the countercyclical capital buffer (CCyB).&nbsp; This buffer varies over time and is currently set at zero percent.&nbsp; All together, these three buffers amount to an additional 6.2 percent in Tier 1 common equity capital, larger than the minimum requirement itself.&nbsp; The size and importance of these buffers is underscored by recent increases in the GSIB scores that will result in increased GSIB buffers absent any changes to the way GSIB buffers are calculated or actions by Forum members to significantly reduce these scores.&nbsp; As we have discussed <a href="https://fsforum.com/news/fixing-whats-broken-the-gsib-surcharge-near-and-long-term-problems">elsewhere</a>, the increase in GSIB scores largely relates to COVID-related measures to support the economy and are unrelated to systemic risk, yet will have the effect of raising capital standards for large banks.<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="5">Table 1: Forum Member Capital Requirements – Minimum and Buffers</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:93.5pt;">Minimum Requirement</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:93.5pt;">GSIB SurchargeBuffer</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:100.75pt;">Stress CapitalBuffer</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:86.25pt;">CountercyclicalCapital Buffer</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:93.5pt;">Minimum Plus Buffers</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:93.5pt;">4.5</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:93.5pt;">2.7</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:100.75pt;">3.5</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:86.25pt;">0.0</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:93.5pt;">10.7</td></tr></tbody></table></figure>Source: Federal Reserve Board and FSF calculations.&nbsp; Buffers are reported as averages across FSF members.To be precise, the additional 6.2 percentage points are not “required” as a strict regulatory matter.&nbsp; Rather, a large bank can maintain a capital level above 4.5 percent and below 10.7 percent (=4.5%+6.2%) and not be in breach of its regulatory capital requirement.&nbsp; At the same time, once a large bank exhibits a capital level below the minimum plus buffers (10.7% in our example), the bank is restricted in its ability to make capital distributions to shareholders.&nbsp; Moreover, the restrictions become more severe as capital levels move closer to the minimum requirement of 4.5 percent.&nbsp;<h3>Buffers and the COVID Experience – Buffers Did Not Work as Intended</h3>Recent research from the Federal Reserve Board, mentioned above, shows that buffers have not worked as intended during the pandemic.&nbsp; More specifically, these researchers find that “[o]ne feature of the ongoing economic crisis is that large banks, both domestic and foreign, have shown considerable reluctance to lower their capital levels below these buffers, in spite of repeated encouragement by regulators to do so.”&nbsp; This final point is worth emphasizing.&nbsp; In the earliest stages of the COVID pandemic, regulators made <a href="https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200317a1.pdf">public statements</a> encouraging banks to make use of their buffers.&nbsp; The clear lack of buffer usability presents a serious challenge to the large bank prudential framework because buffers play such a central role in the overall system.&nbsp; A failure of buffers to work as intended represents a significant problem for the entire capital framework.<h3>What Gives?&nbsp; Why Don’t Buffers Work As intended?</h3>A natural question to ask is why buffers have not worked as intended during the pandemic?&nbsp; One clear and convincing possibility is provided in another recent Federal Reserve Board <a href="https://www.federalreserve.gov/econres/feds/files/2021043pap.pdf">research</a> paper.&nbsp; Specifically, the authors consider the fact that outside analysts would view the use of any buffer as a sign of weakness, leading to a ratings downgrade. Such a downgrade would impair a bank’s ability to raise funding and generate unwelcome instability as the entire market reassesses the stability and creditworthiness of a bank that has used its buffer.These findings are important because they provide a clear and logical explanation for why buffers cannot be relied upon as a source of flexibility in the regulatory capital regime.&nbsp; Simply put, banks do not operate in isolation and can’t act unilaterally, regardless of the signal that these actions send to the broader market.&nbsp; Ultimately, bank regulation must recognize and account for the broader ecosystem in which large, global banks operate.&nbsp; Importantly, during periods of stress market perceptions constrain bank behavior irrespective of regulatory flexibility.&nbsp; Also, these events should cause regulators to re-evaluate whether markets can truly incorporate a complex buffer scheme into their evaluation of a bank’s financial health.&nbsp; It may simply be the case that the need for simple rules and benchmarks by market participants and the public render a complex buffer framework impractical.The implication of these findings is significant.&nbsp; If it is the case that external market perceptions render buffers unusable, then buffers are simply another “minimum requirement” that serve to ratchet up capital requirements.&nbsp; Accordingly, the economic cost of the buffer requirements increases as there is no real scope for flexibly using the buffers in practice.&nbsp; Moreover, to the extent that regulators assessed the costs and benefits of the current framework by assuming that buffers had some benefit due to their potential flexibility in times of stress, recent events suggest that these benefits are overstated and the overall levels of capital required by the buffer framework may not adequately balance costs and benefits.<h3>The COVID Experience: A Lesson for the Countercyclical Capital Buffer?</h3>As shown in Table 1, the Countercyclical Capital Buffer (CCyB) is another capital buffer.&nbsp; Currently, the CCyB is set to zero, but some support “turning it on” to a positive value.&nbsp; The idea is that if the CCyB is non-zero, when a period of instability arises, regulators can reduce the CCyB and banks can reduce their capital levels to support lending.&nbsp; This theory, however, must be considered in light of the recent experience on the non-usability of buffers.&nbsp; In particular, the incentives created by the expectations of market participants during a period of instability may significantly limit the efficacy of any reduction in the CCyB.&nbsp; Specifically, a bank that decides to reduces its capital during a period of stress may be perceived as being weak – even if the capital reduction is fully authorized and even encouraged by regulators.&nbsp; Also, the complexities presented by asking market participants to correctly interpret the use of a buffer during a period of instability would surely be daunting.&nbsp; The risk of misinterpretation and miscommunication would be large.&nbsp; Ultimately, investors and analysts may care little about regulator statements just as they seemed not to be swayed by such statements during COVID.&nbsp; Accordingly, an increase in the CCyB may only succeed in ratcheting up capital requirements for large banks without any attendant benefit because the promised flexibility is not available in practice.<h3>Conclusion&nbsp;</h3>Buffers are a central feature of the large bank regulatory regime.&nbsp; The buffer system is complex, and for buffers to be effective, banks, investors, and other market participants must have a fine-grained understanding of that regime.&nbsp; Recent evidence from the COVID pandemic suggests that the buffer system has not worked as intended by regulators because buffer use sends a negative signal to market participants.&nbsp; Rather than providing flexibility to the capital framework, buffers ratchet up minimum capital requirements.&nbsp; Regulators should take stock of recent experience with the buffer system and consider the appropriate role of buffers in the large bank regulatory framework – especially in relation to setting the CCyB.&nbsp;

A One-Way Ratchet: Buffers and the COVID Pandemic Experience

<h3>Introduction</h3>Yesterday’s release of the FSOC Report on Climate-Related Financial Risk clearly demonstrates increased attention by policymakers and the public on the potential impact that climate change may have on the financial system.&nbsp; By climate change, we mean long-run changes in our climate that are expected to unfold over several decades. Large financial institutions have already taken a number of important steps to identify, assess, and manage climate-related financial risk. When we think about how climate change may inform large bank regulation, we must be thoughtful about the challenges presented by climate change, the risks that capital are intended to address, and measures institutions and regulators are already taking to address the complexities of climate change.&nbsp; In this post, we discuss climate change and its relation to large bank capital and risk-management policies.&nbsp; As in the FSOC report, we find that a focus on risk management, including scenario analysis, is important to address climate-related financial risk.<h3>Climate Change, Risk Management and Large Bank Capital</h3>A key characteristic of climate change is its long horizon.&nbsp; The effects of climate change are expected to unfold over decades, and not months.&nbsp; Capital requirements are keyed to a much shorter horizon, such as a few months or quarters.&nbsp; The reason for this short-term horizon goes to the central purpose of capital.&nbsp; Capital is a financial resource contributed by shareholders that is intended to absorb losses in the short-term that can’t otherwise be mitigated through risk-management actions.&nbsp; In this sense, risk management is the “first line of defense,” while capital is the “last line of defense.”&nbsp; When dealing with long-term trends, banks regularly engage in a number of risk-management activities that change and improve their economic risk exposures long before capital would be needed.&nbsp;For example, if banks perceive a rising risk of flooding over the next 25 years from rising coastal sea levels, they can incorporate those views directly into their lending decisions.&nbsp; This proactive risk management is forward-looking and comes well before any build-up of risk.&nbsp; Moreover, this risk-management activity effectively responds to emerging climate trends to efficiently reallocate resources from those industries and assets that are expected to be most affected by climate change.&nbsp; The long-run nature of climate change strongly suggests that risk-management policy should be proactively applied over time to ensure bank safety and soundness while also ensuring an agile economy that responds to the market signals presented by a changing climate.&nbsp;Some have argued that capital policy should be recalibrated to address climate change because higher capital requirements will disincentivize certain activities that may contribute to climate change.&nbsp; It is certainly true that higher capital requirements increase the cost of financing and disincentivize investment.&nbsp; At the same time, it is critical to recognize that the primary purpose of capital requirements is to ensure a safe and sound banking system by guarding against short-run economic shocks that can’t be predicted.&nbsp; Capital requirements that are designed to incentivize economic behavior risk reducing the effectiveness of capital as a tool to support bank safety and financial stability.&nbsp; In addition, it is important to note that predicting how climate change will impact different parts of the economy is extremely difficult given all of the uncertainties and connections between different sectors, industries and climate policy.&nbsp; Accordingly, using capital requirements to influence investment decisions risks creating the wrong incentives that would impede the most productive means of dealing with climate change.Finally, two potential consequences of using capital requirements to deal with climate change should be considered.&nbsp; First, increasing the cost of credit to certain industries may frustrate their ability to invest in emerging technologies needed to address climate change.&nbsp; Second, disincentivizing certain activities through bank capital requirements may simply push those activities outside of the regulated banking sector, which may have broader financial stability effects while not influencing the overall level of activity.<h3>Climate Change and Stress Testing</h3>Some have also suggested that climate change be incorporated into bank stress tests that assess large bank resiliency over a nine-quarter horizon.&nbsp; As discussed, the long horizon associated with climate change simply does not line up with the relatively short horizon of the stress tests.&nbsp; Also, stress tests are currently implemented by assuming that balance sheet composition is fixed and unchanging.&nbsp; In the case of climate change, this assumption would be violated as banks’ risk-management assessments will lead them to adjust their business models to account for the long-run challenges of climate change.Further, unlike more traditional capital requirements, the stress tests are designed to assess bank resiliency in a period of financial and macroeconomic stress.&nbsp; It is altogether unclear that a period of short-term macroeconomic stress would coincide with a period of climactic stress. Climate change’s lack of any clear association with relatively short-term macroeconomic stress makes its inclusion into the stress tests even more problematic.<h3>Climate Change and Risk Management</h3>If capital requirements and stress testing are not natural policy levers for addressing climate change, then what policies can be effective?&nbsp; Ongoing and active risk management by large banks is a critical tool for addressing climate change.&nbsp; Climate change and the associated government policy response may well have wide-ranging economic ramifications over the long run.&nbsp; As banks assess these impacts on the economy, they will make decisions about resource allocation and business lines that directly respond to fundamental economic signals – such as the economic signal sent by a carbon tax.&nbsp;One tool that has been discussed in this context is scenario analysis.&nbsp; Scenario analysis maps out the potential impact of long-run climactic change – such as a rise in coastal sea levels – and then assesses a bank’s exposure to that change.&nbsp; Scenario analysis is a useful tool in this regard for two reasons.&nbsp; First, such analyses are, by design, exploratory as it is hard to predict what will occur over long periods of time.&nbsp; Scenario analyses allows for considerable flexibility in measuring the impact of climate change and recognizes the uncertain nature of the exercise.&nbsp; In particular, scenario analysis can be flexibly targeted to the specific assets and exposures of an individual bank in a way that would not be possible with a standardized climate scenario.&nbsp; Second, scenario analyses can be useful for identifying those businesses, assets and practices that may need to change over the long run. As experience with scenario analyses builds, and data on climate change unfold, banks can take concrete risk-management steps that align with the economic realities they face.<h3>Conclusion</h3>A changing climate presents a number of important issues for our environment and society over a long period of time.&nbsp; As we deal with these challenges, it is important to keep the appropriate role of risk management and bank capital requirements in perspective.&nbsp; As the first line of defense, risk management has a natural role to play in the long-term management of climate-related challenges.&nbsp; In light of the long-run nature of climate change, capital and stress testing policy is less likely to be the most appropriate policy tool for addressing climate change.&nbsp; Using capital requirements to address climate change risks reducing the effectiveness of capital as a safety and soundness tool, reducing the availability of finance to those sectors that will need to address climate-related challenges, and may push important activities outside the regulated banking sector.&nbsp; Ultimately, addressing climate change will require a persistent, economy-wide effort that involves all sectors to ensure that we address climate change in a way that is effective and inclusive without leaving any segment of the economy behind.&nbsp;&nbsp; &nbsp;&nbsp;Read the Forum's statement following the release of the Financial Stability Oversight Council’s (FSOC) report on climate-related financial risks and financial stability <a href="https://fsforum.com/news/largest-u-s-banks-welcome-efforts-to-advance-climate-change-risk-management">here</a>.

First Things First: Climate, Risk Management, and Capital for Large Banks

<h3>Introduction</h3>Over the last several years there has been a heightened focus on climate-related financial risk in the banking sector.&nbsp; Much of the discussion has been high level and qualitative because of the complex conceptual, data, and modeling challenges at play.&nbsp; Recently, researchers from the Federal Reserve Bank of New York and New York University released a <a href="https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr977.pdf">research paper</a> that attempts to estimate climate risk in the banking sector.&nbsp; Data-based research that attempts to quantify these risks is welcome because it imposes important and much needed discipline on the problem of quantifying climate related financial risks.&nbsp; At the same time this effort, and efforts like it, should be viewed cautiously in light of its early stages as well as the many significant data, modeling and broader conceptual challenges presented by the problem of measuring climate risk in the financial system.&nbsp; Indeed, a review of the paper’s findings shed important and appropriate light on the high degree of variability and uncertainty in climate risk estimates.&nbsp; Academic research of this kind is in its infancy.&nbsp; Accordingly, the results of this and related research should be viewed with a healthy dose of caution and should not be interpreted as conveying settled or established facts.&nbsp; In this post, we briefly review the paper and discuss some of the conceptual and empirical challenges that are highlighted by this work.&nbsp;<h3>Systemic Risk and Climate Risk: Measurement Challenges</h3>The paper attempts to estimate climate risk by utilizing and further innovating a statistical measure of “systemic risk” – SRISK – that was introduced to the economics literature a decade ago.&nbsp; Ten years sounds like a long time, but in the context of reaching consensus on the` validity of a new empirical measure, 10 years is not very long at all.&nbsp; This is even more true in the case of systemic risk measures because systemic risk is inherently difficult to measure from a conceptual standpoint.&nbsp; These challenges are well known and have been seriously considered for as long as people have been trying to measure systemic risk.&nbsp; And while SRISK is one measure among many that is considered by economists and policymakers, it is far from universally accepted as a measure of systemic risk providing pinpoint accuracy.&nbsp; The climate version of SRISK – CRISK – should accordingly be viewed with an even greater degree of caution and humility.&nbsp; We are still at the early stages of systemic risk measurement and indeed at the earliest stages of systemic climate risk measurement.<h3>Climate Risk Measurement: Conceptual Challenges</h3>The CRISK measure offered by the researchers does present some interesting conceptual questions for climate risk measurement.&nbsp; Put briefly, the CRISK measure attempts to quantify the capital shortfall that would occur at a bank in the event of a significant climate stress event.&nbsp; At a conceptual level, this is an interesting measure, but operationalizing it in practice raises several, important conceptual issues.&nbsp;First, the measure is heavily dependent on historical fluctuations in the market value of equity.&nbsp; Market values should never be ignored, but market values are also known to be highly susceptible to bouts of volatility that are driven by short-term investor sentiment and not long-run fundamental risks.&nbsp; This feature of asset prices is well known and long ago led Paul Samuelson to famously quip that the stock market had predicted “nine of the last five recessions.”&nbsp; To be clear, market valuations should never be ignored, but there is an open question about how informative they are about long-run, fundamental risks such as systemic climate-related financial risks.&nbsp; Correlations with market values should not be immediately and uncritically identified with fundamental risks like climate risk.Second, the paper acknowledges that CRISK is solely focused on “transition risk,” by which the authors mean that risk associated with a significant policy shift toward a lower carbon economy, which has negative consequences for certain sectors of the economy.&nbsp; The authors empirically proxy for transition risk by using the market return on a portfolio of fossil fuel companies.&nbsp; The idea is that a policy shift toward a greener economy would result in negative returns to the fossil fuel industry.&nbsp; The analysis then empirically measures the historical sensitivity of bank equity prices to this fossil fuel portfolio.This exercise is emblematic of much empirical economic research.&nbsp; Researchers have a theoretical concept in mind that they want to measure in the data, but the data are imperfect and some highly imperfect proxy must be put forward to do any analysis.&nbsp; In such cases, we should be careful to consider whether the proxy faithfully and accurately represents the target concept.In this case, there are reasons to suspect that the identified transition risk proxy may not be fully accurate or adequate.&nbsp; Specifically, the fossil fuel industry could exhibit fluctuations for a number of reasons – such as supply shocks or political instability – that bear no relation to climate risk.&nbsp; Accordingly, the measured sensitivities may reflect sensitivities to factors that are unrelated to climate risk.&nbsp; Moreover, it’s not exactly clear how the fossil fuel industry would adapt – and over what timescale it would adapt – to a green policy transition.&nbsp; For example, fossil fuel industries may innovate and expand into greener technologies that could actually lead to an increase in their equity value.&nbsp; More broadly, the exercise of predicting how transition risk will arise and how it will impact the economy or the banking is sector is speculative by design.&nbsp;Third, the paper is based on historical statistical analysis.&nbsp; The world learns a lot from historical statistical analysis, but it is important to be fully cognizant of its drawbacks.&nbsp; Predicting the future with the past is fraught with peril and that is especially true when we are considering a transition to a new economic regime that has not been experienced or tested.<h3>CRISK: Some Observations on the Findings</h3>Despite the conceptual and measurement challenges that abound, the research is worthwhile as a means of exploring an interesting question in a systematic fashion.&nbsp; Below, we reproduce the estimated CRISK figure for large U.S. banks and make some observations on the findings.<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2021-10-07-at-5.22.01-pm.png"></figure>Recall that the CRISK measure is attempting to measure the capital shortfall that would occur in the event of a systemic, transition-related climate event.&nbsp; Accordingly, a CRISK value of zero implies that a bank has no systemic climate risk, a positive value indicates that a bank would experience a capital shortfall if the systemic climate event is realized, and a negative value implies that a bank would enjoy a capital surplus if the systemic climate event is realized.The first thing to note from the figure is that the estimates are quite volatile.&nbsp; For some banks the measure ranges from negative to positive $150 billion.&nbsp; Also, these results are “smoothed,” which means that the estimates vary even more in the underlying data and the researchers have averaged the results to suppress the amount of variability in the results.&nbsp; The volatility in the results likely owes to the heavy reliance on financial market values.&nbsp; In reality, it seems doubtful that systemic climate related financial risk varies so much as it should be related to the fundamental risk and business profile of a bank.&nbsp; The variability in these (smoothed) results clearly communicates the noisy and early-stage nature of the climate risk measure.It is also interesting to note that for all the banks above, the estimated climate risk is often close to zero and more often negative than positive.&nbsp; This means that, according to the analysis, a bank would often experience a rise in its equity value in the event that the hypothetical climate risk event were realized.&nbsp; This finding should also convey the complexity associated with trying to measure systemic climate risks with available data.&nbsp; Some have noted that the estimated level of CRISK for some banks in 2020 is elevated.&nbsp; It is simply not appropriate to evaluate the estimated CRISK measure in 2020 without taking into account the large degree of variability in CRISK over the entire sample period.&nbsp; The broader frame puts the 2020 estimates into appropriate context as being the product of early-stage academic research.&nbsp;Finally, the fact that the estimated CRISK is often negative and fluctuates from negative to positive over the sample period may hold some lessons on the nature of climate risk in the banking sector.&nbsp; Banks are intermediaries; as such, they may be well positioned to benefit from transition risk as they channel resources to those industries that are adapting to a low-carbon economy.&nbsp; Banks’ fundamental role as intermediaries may actually work to limit their overall climate-related financial risk.&nbsp; &nbsp;&nbsp;<h3>Conclusion</h3>All good research raises more questions than it answers.&nbsp; The present paper does that by rigorously exploring an important economic question.&nbsp; Measuring systemic, climate-related financial risk is important and should receive more attention.&nbsp; Putting quantitative discipline on the problem will, over the long haul, improve our understanding of climate risk and its economic impact.&nbsp; At the same time, we must recognize that we are at the earliest stages of understanding -- let alone measuring -- climate-related financial risks.&nbsp; Estimates of climate risk from this and related research should not be taken as an accurate or incontrovertible measure of climate-related financial risk.&nbsp; The available data and methods are too new, untested, and imperfect. We should continue to learn from this research while at the same time underscoring the significant conceptual and measurement challenges that remain.&nbsp;&nbsp;&nbsp;&nbsp;

Proceed with Caution: Measuring Climate Risks in the Banking Sector

<h3>Introduction</h3>Recently, the Financial Services Forum, jointly with a number of other trade associations, responded to the Basel Committee on Banking Supervision’s <a href="https://www.bis.org/press/p210610.htm">consultation</a> on capital requirements for cryptoassets, or “crypto.”&nbsp; In this post, we lay out the key points from our <a href="https://fsforum.com/news/forum-backs-global-standards-for-cryptoasset-regulation">joint letter</a> and provide some thoughts on the future evolution of bank capital requirements for crypto.&nbsp; Overall, the consultation prescribes a punitive capital treatment for crypto that does not account for the specific risks of these assets or the way in which large banks manage these risks.&nbsp; The proposed capital treatment risks pushing crypto activity well outside the regulated banking sector and into less well-regulated corners of the financial system.&nbsp; Doing so would deprive businesses and investors of the opportunity to deal with banks in this new market, would impede responsible innovation, and would increase systemic risk to the economy.&nbsp; Bank regulators should reconsider the proposed requirements with an eye toward establishing a risk-sensitive regulatory framework that does not preclude banks from contributing to the development of this new market.<h3>Banks Should Contribute to Crypto Development and Innovation</h3>Technological innovation is the hallmark of a growing economy.&nbsp; And banks have long been and will continue to be important incubators for financial innovation.&nbsp; Crypto as a new financial innovation has garnered quite a lot of recent attention and not all of it has been good.&nbsp; Some have derided crypto solely as a “scam” or a tool for facilitating illicit activity.&nbsp; These claims are unhelpful and premature given the nascent state of this market.&nbsp; Like all new innovations, it is hard to predict how crypto will evolve and how it will fit into the economy in the years to come.&nbsp; And the crypto of today will likely bear little resemblance to the crypto of tomorrow.&nbsp; Figuring all of this out takes time and the innovative efforts of a broad range of diverse participants.&nbsp; What can be predicted, however, is that more participants working together will have a better chance of successful and responsible innovation than fewer participants.&nbsp; And there is good reason to believe that large banks have a lot to offer in innovating crypto.&nbsp; Specifically, large banks have deep expertise in facilitating financial intermediation and risk management across a range of financial markets.&nbsp; This deep expertise, including the lessons of the past, can most assuredly be put to effective use as the economy works through the complex issues associated with building safe and effective uses for crypto technologies.&nbsp; Bank participation will improve the quantity and quality of innovation while also giving regulators a clean line of sight into this new and emerging market.<h3>Crypto Capital Requirements Should Reflect Risk and Leverage Existing Requirements</h3>There is no doubt that crypto entails risk.&nbsp; There is also no doubt that banks should be subject to a sensible capital regime that accounts for these risks.&nbsp; Unfortunately, the recent consultation proposes a punitive and blunt capital charge that effectively assumes that a holding of certain crypto exposures loses 100% of its value.&nbsp; More importantly, the proposed treatment largely ignores how banks risk manage and hedge these positions to reduce risk, which would render any significant crypto activity uneconomic.The associations’ joint response letter proposes a different and better approach to crypto capital.&nbsp; Our proposal is data-based, reflects the actual risk-management practices of banks, and broadly fits within the existing capital regime for large banks, which is already designed to account for exposures to volatile assets.&nbsp; In short, we have proposed a conservative, data-based approach for crypto exposures that would result in a capital charge that is only slightly less than that of the Basel proposal for an outright and unhedged holding of crypto.&nbsp; The key difference in our proposal, however, is that we propose that hedging be recognized for crypto assets that have a demonstrated, liquid, two-way market.&nbsp; This treatment is fully consistent with the existing capital treatment for other volatile financial assets, such as certain currencies or commodities.&nbsp; For cryptoassets that are newer and less well tested, we propose a treatment that coincides with the proposal’s treatment until such time that a liquid, two-way market for these cryptoassets can be demonstrated.This approach to crypto capital is risk-sensitive and establishes appropriate guardrails to ensure safe and sound banking practices while allowing for an onramp to a more risk-sensitive capital treatment.&nbsp; In addition, the proposed treatment is broadly consistent with the existing capital framework for large banks.&nbsp; Consistency with the exiting regime is an important feature of our proposal.&nbsp; The existing large bank capital regime has been subject to significant development and enhancement for over a decade.&nbsp; As markets evolve, regulators should first work to leverage the existing capital framework before adding new and untested components that unnecessarily complicate the framework.&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;<h3>Crypto and Financial Stability</h3>New products and markets present new risks that must be managed.&nbsp; Experience has shown that these risks can grow rapidly and present the greatest risks to financial stability when they exist largely outside the regulatory perimeter.&nbsp; The recent pandemic experience has shown that innovations occurring largely outside the regulated banking sector exhibited the most instability and are in the greatest need of consideration.&nbsp; Bank capital requirements should not be set in a manner that explicitly incentivizes the development of crypto markets outside the banking system.&nbsp; Rather, bank regulation should allow and not preclude bank participation and innovation in these markets.&nbsp; The active participation of regulated banks should also improve the ability of regulators to monitor these markets as they develop.&nbsp; The current capital proposal risks excluding regulated banks from this market and concentrating these activities in less well-regulated corners of the financial system, setting the stage for increased systemic risk.&nbsp; Capital requirements that are in line with our proposed approach would help ensure broader participation in these markets, which would improve transparency, oversight and financial stability.<h3>Conclusion</h3>Like all new innovations, the future path of crypto is uncertain.&nbsp; To realize the full potential of crypto for our economy, it is imperative that the market benefit from broad participation that includes those with deep expertise in financial markets and risk management.&nbsp; Large banks are indeed a deep well of just this kind of experience that can surely contribute to responsible and durable innovation in crypto markets.&nbsp; Large bank participation will also promote a safe and sound regulatory approach to crypto that can inform regulation in other sectors, while enhancing the ability of regulators to monitor this emerging market. &nbsp;The Basel Committee’s proposed requirements should be reconsidered in light of the need to embrace responsible financial innovation in a manner that promotes stability and serves the entire economy.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;

Kryptonite for Cryptoassets? Cryptoasset Capital Regulation, Innovation and Systemic Risk

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Michael Chasen

Research Associate, Policy Research

<h3>Introduction</h3>Nearly one and half years ago, at the beginning of the worldwide COVID-19 pandemic, local and federal governments instituted shutdowns, mandating the closure of some businesses in order to slow the spread of the virus. As part of government efforts to help prevent the mass unemployment and economic crisis that would naturally arise from such a measure, the Paycheck Protection Program (PPP) was implemented to support small businesses. Through this program, existing banks are utilized to supply forgivable government loans to affected businesses, allowing these businesses to continue to pay their employees and make good on other financial commitments during the pandemic. In the previous BankNotes blogs, “<a href="https://fsforum.com/news/supporting-small-businesses-through-ppp-lending">Supporting Small Businesses Through PPP</a>”&nbsp; and “<a href="https://fsforum.com/news/large-banks-support-small-business-across-a-range-of-industries-through-the-ppp">Large Banks Support Small Businesses Across a Range of Industries Through the PPP</a>,” Dr. Sean Campbell showed how the data on loan sizes and jobs supported by PPP in 2020 reflect the commitment of Forum members to prioritize lending to small businesses. Recently, the Small Business Administration (SBA) released new data concerning PPP lending, showing that Forum members continued to focus on providing loans to small businesses as the program extended into 2021.<h3>Forum Members Primarily Supported Small Businesses Through Their Lending</h3>One year and four months after the beginning of the Paycheck Protection Program (PPP), Forum members have extended PPP loans to 1.25 million businesses with a median loan amount of $21,572. These loans have been organized by loan size in Figure 1 below. Eighty percent of the loans (over 1 million) were under $75,000 and 54 percent were under $25,000, showing that our members have prioritized small businesses for relief. One quarter of all loans were just over $10,000. All in all, Forum members have facilitated the transfer of $94 billion to primarily small businesses during the pandemic.<figure class="image image-style-align-center"><img src="https://fsforum.com/a/media/screen-shot-2021-09-07-at-4.01.12-pm.png"><figcaption>Data available from SBA</figcaption></figure><h3>Jobs Supported by the Forum</h3>The goal of the PPP initiative was to keep businesses afloat during the pandemic and provide paychecks for the employees of those businesses. The number of jobs supported by each PPP loan is recorded in the SBA data. Using these data, Figure 2 displays the share of Forum PPP loans that went to businesses with different numbers of employees. Almost 60 percent of the loans went to businesses with fewer than 5 employees. Nearly 80 percent went to businesses with fewer than 10. Ninety-eight percent of the Forum members’ PPP loans were extended to businesses with fewer than 50 employees, highlighting the efforts of the Forum members to prioritize small businesses. In total, through these 1.25 million loans, our member banks supported over 13 million jobs.<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2021-09-07-at-4.04.01-pm.png"><figcaption>Data available from SBA</figcaption></figure><h3>Conclusion</h3>Sixteen months after the inception of the Paycheck Protection Program, our members have extended loans to 1.25 million businesses, supporting more than 13 million jobs. Half of all loans extended were for less than $22,000 and half of all businesses supported by the Forum members had three employees or less. These data show that our member banks are focused on providing support where it is most-needed, i.e., small businesses. Throughout the pandemic, Forum members have shown their ability and willingness to help the American people through supporting American business, and they will continue to extend that help into the future.

PPP Lending: Forum Members Come Through Big for Small Business

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Supporting Communities During the Pandemic

The COVID-19 pandemic is an unprecedented challenge for the world and the global economy and the largest U.S. banks are committed to supporting customers, clients, and the nation.

PPP loans from JPMorgan have supported 3 million workers at small businesses, including those working at Community Wellness Ventures, a mental health services company that serves children and families in Washington, D.C. The PPP loan has helped Dr. Charlayne Hayling-Williams and her husband, Dr. Rod Williams, continue to pay their counselors, social workers, psychologists and housing specialists so that they can continue to serve their community.The majority of Citibank’s PPP loans went to small businesses in the service sector. A PPP loan from Citi helped the Maryland Youth Ballet in Silver Spring retain teaching staff and find a way to teach students safely and retain employees. The students range in age from 2 to 19 years old. “If we hadn’t been able to receive this PPP loan, we wouldn’t be able to keep dancing,” Principal Deidre Byrne says. <a href="https://www.youtube.com/watch?v=dMzepw_oAtQ&amp;feature=youtu.be">Learn more</a>.State Street is a lead sponsor of <a href="https://www.smallbstrong.com/">Small Business Strong</a>, a non-profit organization helping women and minority owned small businesses navigate the devastating impact of the COVID-19 pandemic. Small Business Strong provides expedited, pro-bono resources to small businesses ranging from access to capital to consulting, business restructuring, business growth, digital marketing and customer engagement plans.Another way Forum banks have worked to assist small businesses is by supporting financial institutions with particularly strong connections to certain local communities. Forum banks have increased their support for Community Development Financial Institutions (CDFIs) during the pandemic. CDFIs are private financial institutions that are dedicated to providing responsible, affordable lending to help low-income and typically underserved communities. From 2015 to 2020, <a href="https://www.fsforum.com/wp-content/uploads/2021/01/cdfifactsheetfinal2021.jpg">Forum banks have invested nearly $9 billion in CDFIs.</a> Through such assistance, Forum member banks are working to ensure that small businesses in these communities get the help they need.Goldman Sachs last year committed $1 billion to support lending through CDFIs and other mission-driven lenders. More than 15,000 small businesses with 87,000 employees were supported just partway through the commitments. Nearly half of the initial funds went to businesses in minority communities; one-third went to those in low-income communities. <a href="https://www.forbes.com/sites/maneetahuja/2020/12/15/goldman-sachs-ceo-david-solomon-announces-additional-250-million-investment-in-small-businesses-bringing-total-2020-commitment-to-1-billion/?sh=3739ddc91000">Read more</a>.

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Supporting Small Businesses

Members of the Financial Services Forum have supported small businesses across the country throughout the pandemic, helping provide important resources during a challenging time for many business owners and their employees.

Throughout the pandemic, Forum members facilitated $94 billion in loans to nearly 1.25 million small businesses through the government Paycheck Protection Program. More than a quarter of these loans were made in low- and moderate-income communities and 91 percent of the PPP loans made by Forum members went to businesses with 20 or fewer employees.

At the beginning of 2020, Morgan Stanley launched the <a href="https://www.morganstanley.com/articles/alliance-for-childrens-mental-health-covid-19">Morgan Stanley Alliance for Children’s Mental Health</a> to help address children’s mental health, specifically the far-reaching challenges of stress, anxiety and depression. After the COVID-19 pandemic began, Morgan Stanley made an additional grant to the Child Mind Institute to provide digital mental health resources for children, adolescents and young adults, with a focus on vulnerable communities that traditionally lack access to these resources.Among other areas of focus, the Alliance is promoting public awareness of how the COVID-19 pandemic affects children’s mental health—both now and in the long term.In addition to providing relief to millions of customers, Wells Fargo has redirected millions of dollars from its philanthropic budget to COVID‑19 community relief efforts for the most impacted Americans. The company has worked to streamline grant making and offer highly flexible funding to nearly 1,000 nonprofits reaching more than 800 communities across the country.The program is making a difference in helping those who need it most access small business resources, stay in their homes and obtain financial health resources. In Alabama, a $100,000 grant to the Birmingham Strong Fund is providing emergency loans to small businesses to help stabilize employment, stimulate economic vitality, and offset losses related to COVID‑19. A $100,000 grant to United Way of Greater Los Angeles has helped the group create the Pandemic Relief Fund to support vulnerable populations who are at the greatest risk of health and economic impacts in this crisis. A $160,000 grant to the Institute of Community Alliances is providing rental assistance to shelter residents across the state of Iowa.Bank of America in 2020 announced a $1 billion, four-year commitment of additional support to help local communities address economic and racial inequality accelerated by the global pandemic. The programs are focused on assisting people and communities of color that have experienced a greater impact from the health crisis in areas that include:<ul><li>Virus testing, telemedicine, flu vaccination clinics, and other health services, with a special focus on communities of color.</li><li>Partnerships with historically black colleges and universities and Hispanic-serving institutions in the United States for hiring, research programs, and other areas of mutual opportunity.</li><li>Support to minority-owned small businesses, including clients and vendors.</li><li>Career reskilling/upskilling through partnerships with high schools and community colleges.</li><li>Operating support and investment for affordable housing/neighborhood revitalization, leveraging the company’s nearly $5 billion in Community Development Banking.</li><li>Further recruitment and retention of teammates in low- to moderate-income and disadvantaged communities to build on work the company has already done to serve clients locally.</li></ul>

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Supporting Communities

Forum members have collectively committed billions of dollars to communities in need. This aid is helping organizations and governments increase medical response capacity, address food insecurity, increase access to education in the face of school closures, protect impacted small businesses and provide support to the vulnerable populations.

Financial support is being dispersed to a number of organizations and programs such as the World Health Organization’s COVID-19 Solidarity Fund, the CDC Foundation, No Kid Hungry, Feeding America, National Centers for Disease Control and Prevention’s Emergency Relief Fund, the International Medical Corps and many other community-specific groups.

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Supporting Individuals

Forum members have been supporting their customers in a variety of ways, including by providing fee waivers, payment deferrals, and other assistance to help customers in need, with no negative credit bureau reporting for up-to-date clients.

Another key way in which large banks are serving households is the provision of safe, secure deposit accounts. 

People use deposit accounts as a safe store of value during uncertain times. With general economic uncertainty and an increase in market volatility, people are relying more on safe, liquid, bank deposits as they manage a variety of near-term risks. 

As people demand a safe store of value for their hard-earned money, Forum members have provided this critical service. Forum members provide depositors with a range of online services to access their deposits remotely, which are all the more valuable as people practice social distancing. 

Since the start of the crisis, <a href="https://www.bnymellon.com/us/en/insights/content-series/covid-19.html">Bank of New York Mellon</a> has worked to support its employees and their families with a number of actions and programs. The bank has provided paid leave benefits and an Employee Assistance Program for all employees and their direct family members, including a 24/7 COVID-19 support line. It is providing enhanced U.S. healthcare coverage so that COVID-19 testing and related outpatient services are provided without any employee out-of-pocket expense. The firm has also provided a 2-for-1 match for employee donations.

Father and child at a medical appointment 

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Supporting Our Employees

Forum members are actively helping ensure the health and well-being of their more than 750,000 employees. 

From special compensation awards, to additional time off, to counseling services, the nation’s largest banks have been taking significant steps to support their workforces.

In 2020, Forum member institutions:<ul><li>Increased credit to businesses and households by $785 billion to nearly $8.3 trillion.</li><li>Helped raise $2.2 trillion in corporate bonds and $339 billion in equity through the third quarter for U.S. companies, allowing them to continue to pay their workers, operate their businesses and meet their funding needs. This capital raising by large banks fulfills a critical need in the economy to connect savers, such as pension funds and endowments, with companies like Pfizer and 3M that need to borrow capital for everyday business needs. <a href="https://www.fsforum.com/types/press/blog/building-bridges-between-savers-and-borrowers-during-the-pandemic-large-bank-underwriting/">Read more</a>.</li><li>Remained strong and resilient, despite the significant headwinds. The members of the Financial Services Forum in 2020 increased capital and strengthened their liquidity positions while at the same time supporting business and consumers.</li></ul>

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Supporting the Economy

Forum member institutions have been a key source of support for the economy during the pandemic. They have supported the economy in a number of important ways.



Throughout the pandemic, we facilitated $94 billion in PPP loans to nearly 1.25 million small businesses across the country.

COVID-19 Response

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The Goldman Sachs Group, Inc.

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

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

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

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David Solomon

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

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State Street Corporation

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

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

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

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

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

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

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

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Ronald O'Hanley

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

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Bank Of America

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

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

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

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

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Brian Moynihan

Bank Of America Chairman Of The Board And Chief Executive Officer

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BNY Mellon

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.

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Thomas Gibbons

BNY Mellon Chief Executive Officer

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Citigroup

Jane Fraser is the Chief Executive Officer of Citi, the world’s most global bank, serving millions of consumers, businesses and institutions across 160 countries and jurisdictions. She is the first female CEO in the firm’s history.

Jane has deep experience across Citi’s consumer and institutional businesses and, in many ways, she helped shape Citi into the company it is today. Before becoming CEO in February 2021, she was President of Citi and CEO of the Global Consumer Bank, responsible for all of Citi’s Consumer businesses, including Retail Banking and Wealth Management, Credit Cards, Mortgage and Operations and Technology in 19 markets.

Before that, she was the Chief Executive Officer of Citigroup Latin America from 2015 to 2019. From 2013 to 2015, she was the Chief Executive Officer of the U.S. Consumer and Commercial Banking and CitiMortgage. From 2009 to 2013, Jane served as the Chief Executive Officer of Citi’s Global Private Bank. Prior, Jane was the Global Head of Strategy and Mergers & Acquisitions for Citi from 2007 to 2009. She joined Citi in 2004 in the Corporate and Investment Banking division.

Before joining Citi, Jane was a Partner at McKinsey & Company. She started her career at Goldman Sachs in the Mergers & Acquisitions department in London and then worked for Asesores Bursátiles in Madrid, Spain.

She is Vice Chair for Partnership for New York City and a member of the Harvard Business School’s Board of Dean’s Advisors, the Stanford Global Advisory Board, the Economic Club of New York and the Council on Foreign Relations. Jane has an M.B.A. from Harvard Business School and an M.A. in economics from Cambridge University. She is married with two children.

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Jane Fraser

Citigroup Chief Executive Officer

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JPMorgan Chase & Co.

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

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

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

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

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Jamie Dimon

JPMorgan Chase & Co. Chairman And Chief Executive Officer

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Morgan Stanley

Mr. Gorman is Chairman and CEO of Morgan Stanley.

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

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

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

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

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

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James Gorman

Morgan Stanley Chairman And Chief Executive Officer

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Wells Fargo & Company

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

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

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

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

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

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

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

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