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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.

Article

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.

In 2020, Forum members facilitated $69 billion in loans to nearly 850,000 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.



In 2020, we facilitated $69 billion in PPP loans to 848,696 small businesses across the country.

COVID-19 Response

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Sean Campbell

Chief Economist, Head of Policy Research

Last week the Federal Reserve released this year’s stress test results. &nbsp;The results showed that large banks were resilient and robustly capitalized. &nbsp;Indeed, all 23 large banks were shown to maintain sufficient capital to warrant a return to shareholder distributions consistent with the Federal Reserve’s risk-based capital requirements.Figure 1 below shows how Financial Services Forum members fared in this year’s stress tests. &nbsp;As shown in the first bar in the chart, after absorbing a total of $297 billion in hypothetical losses in the severely adverse scenario, Forum members collectively maintained a capital ratio of 10 percent, which is more than double the regulatory minimum of 4.5 percent (the third bar in the chart).<figure class="image image-style-align-center image_resized" style="width:70.82%;"><img src="https://fsforum.com/a/Screen_Shot_2021_06_28_at_9_38_37_AM_7187bc8ba1/Screen_Shot_2021_06_28_at_9_38_37_AM_7187bc8ba1.png"><figcaption>&nbsp;Source: Federal Reserve Board and FSF Calculations</figcaption></figure>Some have argued that this year the stress tests were “too easy” and that the banks are only being permitted to return capital to shareholders because the test was too lenient. &nbsp;This simply doesn’t measure up with the facts. &nbsp;As shown in Figure 1, Forum members would maintain a capital ratio in excess of the minimum requirement even if the stress test losses were significantly larger than those hypothesized by this year’s test. &nbsp;More specifically, as shown in the middle bar of Figure 1, even if stress losses were increased by fifty percent to $445 billion, Forum members would still maintain a capital ratio well in excess of the regulatory minimum. &nbsp;Indeed, not only would Forum members maintain sufficient capital in the aggregate, each individual member would maintain a capital ratio in excess of the regulatory minimum if losses were fifty percent larger than those hypothesized by this year’s test.&nbsp;Finally, the idea that this year’s scenario is somehow too easy doesn’t hold up. &nbsp;In Table 1 below, we compare the value of three key variables in the stress test – the peak unemployment rate, the decline in GDP, and the decline in the stock market – across the 2021 stress scenario and the 2008-2010 recession. &nbsp;<figure class="image image_resized" style="width:74.51%;"><img src="https://fsforum.com/a/Screen_Shot_2021_06_28_at_10_16_20_AM_fff3190dbe/Screen_Shot_2021_06_28_at_10_16_20_AM_fff3190dbe.png"><figcaption>Source: Federal Reserve Board and FRED Database</figcaption></figure>As shown in Table 1, these key variables in the 2021 stress scenario are either more severe or on par with the experience of the 2008-2010 recession.And of course, it goes without saying that there would be some level of scenario severity at which large banks would not have sufficient capital. &nbsp;That statement, however, is simply a matter of arithmetic that itself says nothing about either the proper severity of the stress tests or the capital adequacy of Forum members and other large banks. &nbsp;One can always envision a scarier, and more extreme doom-and-gloom scenario. &nbsp;The mere fact that one can hypothesize more extreme events does not mean that those events are relevant for measuring the capital adequacy of large banks.Indeed, this kind of thinking has also prompted some to argue that the only reason large banks are healthy and strong is because “the government bailed them out” during the pandemic and absent this infusion of funds, the situation would be far worse. &nbsp;This argument is fallacious for two reasons. &nbsp;First, as already shown, Forum members would be resilient to a stress scenario significantly more severe than the 2021 scenario. &nbsp;Second, as a matter of course over the past year, our government engaged in macroeconomic stabilization policy. &nbsp;In other words, the Federal Reserve and the Congress acted swiftly and forcefully to protect the American economy. &nbsp;Those actions benefitted all industries and households. &nbsp;The fact that the government took steps to address an external macroeconomic shock emanating from outside the financial sector to support all businesses and households should not be used as a rationale to penalize the shareholders of large banks. &nbsp;Rather, we should applaud these efforts and recognize the strength and resiliency of our financial system in the face of an unprecedented economic and social shock. &nbsp; &nbsp;&nbsp; &nbsp;

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

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


Capital and Financial Stability

Large Bank Resilience and the Stress Tests

<h3>Introduction</h3>Over the past decade, regulators have taken steps to disincentivize the use of short-term wholesale funding (STWF) by large banks.&nbsp; This regulatory initiative has been driven by concerns that STWF is systemically risky.&nbsp; The chief concern is that if short-term creditors stop extending short-term debt, large banks would be forced to quickly liquidate illiquid assets at “fire-sale” prices that would create large losses and impose large costs on the rest of the economy.&nbsp; This concern fundamentally rests on the assumption that short-term funding is used primarily to finance long-term, illiquid assets.&nbsp; New <a href="https://www.nber.org/system/files/working_papers/w28658/w28658.pdf">research</a> from economists at the Federal Reserve Board and the University of Chicago, however, demonstrates that the role played by STWF in the banking system has changed significantly over the past decade. Specifically, they find that large banks increasingly use short-term wholesale funding to finance low-risk, liquid assets, such as bank reserves, that can be liquidated quickly without taking losses or impacting the rest of the financial system.&nbsp; These findings show that STWF presents a lower level of risk to the financial system and suggests regulators should reconsider how STWF is addressed by financial regulations, such as the GSIB surcharge. &nbsp;<h3>Short-Term Funding and Asset-Liability Management</h3>A key point made in the new research is that the amount of short-term funding, all by itself, does not generate systemic risk.&nbsp; Rather, what matters is how the short-term liability is managed on the asset side of a bank’s balance sheet.&nbsp; Specifically, imagine a situation in which a bank raises $100 in short-term funding – say through the issuance of short-term debt – and then invests that $100 in cash.&nbsp; Now suppose that once the short-term debt matures, short-term creditors are unwilling to re-extend or “roll” the same short-term credit to the bank.&nbsp; In this case, the bank simply repays the creditors with the $100 in cash that it has on hand.&nbsp; Repaying the existing creditors with cash does not result in any losses to the bank or to the creditors and does not impose any spillover costs on the economy.&nbsp; In this case, the use of short-term debt creates no financial stability risk because the short-term maturity of the debt is matched with a liquid asset – cash.&nbsp; As the authors themselves state, “global banks have become more resilient to negative wholesale funding shocks, as they can swiftly reduce their arbitrage positions in response to wholesale funding dry-ups.”&nbsp; In this context, the authors use the term “arbitrage” to refer to situations in which global banks invest funds in liquid assets, such as bank reserves, that pay a rate of interest marginally higher than the rate of interest they pay on the short-term funding.This state of affairs, in which large banks increasingly invest short-term funding in low-risk and liquid assets became increasingly important over the course of 2020 as the Federal Reserve expanded its balance sheet from roughly $4 trillion to $7 trillion.&nbsp; Figure 1 below shows the increase over 2020 in bank reserves and short-term wholesale funding for the eight Financial Services Forum members.&nbsp;<figure class="image image_resized" style="width:62.34%;"><img src="https://fsforum.com/a/image_3e165f5515/image_3e165f5515.png"><figcaption>Data available from FR Y-9C and FR Y-15 forms</figcaption></figure>As can be seen in Figure 1, while total STWF rose for Forum members, so too did bank reserves.&nbsp; What’s more, the increase in bank reserves more than offsets the increase in short-term funding.&nbsp; As a result, the potential risks associated with STWF were largely attenuated for the reasons cited by the Federal Reserve and University of Chicago researchers – each dollar of STWF was matched against a low-risk and liquid asset that could be used to repay short-term creditors at any time.&nbsp; &nbsp;<h3>Short-Term Wholesale Funding and Financial Regulation</h3>The level of STWF employed by FSF members has a direct impact on the level of their GSIB surcharge – an additional capital buffer required by the Federal Reserve that only applies to Global Systemically Important Banks, or GSIBs.&nbsp; As STWF levels rise, so too do does their GSIB score, which then results in a higher GSIB surcharge.As this new research and the data in Figure 1 show, recent changes in the way that STWF is used and managed by large banks suggests that this relationship should be reconsidered.&nbsp; Over the course of 2020, increases in STWF were largely offset by holdings of bank reserves, which pose no risk to the banking sector and can be liquidated quickly to repay short-term creditors.&nbsp; Accordingly, the observed increase in STWF over 2020 does not automatically represent an increase in systemic risk that should be impounded into the GSIB surcharge.&nbsp; More broadly, and over the long term, the way in which STWF is used and managed by large banks has clearly changed.&nbsp; As the role of STWF in the banking system changes, so too should its role in financial regulations, such as the GSIB surcharge.&nbsp; Accordingly, the Federal Reserve should consider this new research and how its findings would impact the way STWF determines GSIB surcharges.&nbsp; &nbsp;&nbsp;<h3>Conclusion</h3>Short-term wholesale funding is viewed by regulators as a source of systemic risk.&nbsp; As a result, financial regulations, such as the GSIB surcharge, have been designed to dis-incentivize its use.&nbsp; The argument that STWF is systemically risky rests on the assumption that the proceeds from STWF will be used to fund long-term, illiquid assets that would be difficult to liquidate if short-term creditors refuse to continue extending short-term funding.&nbsp; New research shows that the way in which the banking sector utilizes STWF has changed significantly over the past decade.&nbsp; Namely, STWF is increasingly used to invest in short-term, liquid assets such as bank reserves that can be easily liquidated to repay short-term creditors.&nbsp; As a result, the risks posed by the use of STWF have declined significantly. The changing risks of STWF should be considered by regulators in the context of financial regulations that dis-incentivize its use, such as the GSIB surcharge.&nbsp;&nbsp;

Changing Realities and Financial Regulation: The Changing Nature of Short-Term Wholesale Funding

<h3>Introduction</h3>As a young economics student, I once asked one of my professors, “Should markets or the government run the economy?” &nbsp;I still remember the puzzled look on my professor’s face as he considered the question. &nbsp;A moment later he answered my question with a question. &nbsp;He asked, “Do you like driving cars?” I quickly nodded my head and he then followed up with, “Well then, do you think the car’s engine should be run by its pistons or its spark plugs?” &nbsp;His point was simple, but important. &nbsp;A car’s (gasoline) engine can’t run without both its pistons or sparkplugs. &nbsp;Having a preference for one over the other simply makes no sense. &nbsp;Similarly, large banks, and all private enterprises, coexist alongside government in our economy. &nbsp;And our modern economy can’t operate productively or efficiently without contributions from both.&nbsp; In this post, we discuss the ways in which large banks and government policy work together to support a strong, stable and growing economy.<h3>Implicit Government Support for Large U.S. Banks Is No Longer Prevalent</h3>A lot has changed in our economy over the past twenty years. &nbsp;In the case of the banking sector, large banks have undergone a number of significant changes to improve their overall safety through stronger capital and liquidity as well as improvements to their corporate structure, risk management, and governance. &nbsp;In addition, regulators have new tools that they can use to address a large bank that is in trouble. &nbsp;As a result of these significant changes, market perceptions that the government implicitly supports or subsidizes large banks have waned. &nbsp;And this observation is backed by data and research. &nbsp;In 2014, the Government Accountability Office (GAO) published a <a href="https://www.gao.gov/products/gao-14-621">report</a> that examined whether market participants expected government support for large banks. &nbsp;The findings of the GAO report showed that the evidence in favor of implicit government support for large U.S. banks had significantly declined by 2014. &nbsp;Specifically, the report found that “recent regulatory reforms have reduced but not eliminated the likelihood that the federal government would prevent the failure of one of the largest bank holding companies.” &nbsp;Since 2014, the evidence in this regard has only strengthened. &nbsp;In “<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3497897">The Decline of Too Big To Fail</a>,” economists at Stanford University and the Australian National University recently found, in 2021, even stronger evidence of a lack of expected government support for large U.S banks. &nbsp;They conclude that, “[t]he data are consistent with measurable effectiveness for the official sector’s post-Lehman GSIB [large bank] failure-resolution intentions, laws, and rules. GSIB [large bank] creditors now appear to expect to suffer much larger losses in the event that a GSIB [large bank] approaches insolvency. In this sense, we estimate a major decline of "too big to fail.”<h3>The Positive Feedback Loop Between Government Support and Large Banks</h3>The fact that large banks do not benefit from implicit government support, however, does not mean that large banks do not benefit from government policy. &nbsp;Large banks, like all businesses and households, benefit from all sorts of government policies.&nbsp; Some policies are narrowly targeted at banks, such as deposit insurance or access to the Federal Reserve’s discount window. &nbsp;Other policies reflect broader government policy that is aimed at supporting the whole economy, such as macroeconomic stabilization policy. &nbsp;Consider the recent government efforts to stabilize the economy during the pandemic. &nbsp;Many of these policies, such as stimulus checks and enhanced unemployment benefits, have been crucial to supporting the economy during the pandemic. &nbsp;And large banks, like all industries and households, have benefitted from a stabilized economy. &nbsp;Effective stabilization policy reduces the severity of macroeconomic cycles and improves outcomes for everyone. &nbsp;Also, and importantly, government policy that supports the economy also helps large banks to continue supporting the economy, which further enhances the effectiveness of government policy. &nbsp;This complementarity between government policy and the contribution of large banks results in a “positive feedback loop” that benefits the whole economy. &nbsp;As the economy improves, large banks are able to further support the economy through lending and financial intermediation, which leads to a further strengthening of the economy. &nbsp;Accordingly, government policy and the activities of large banks work in tandem to support our economy.<h3>Large Banks Have Been a Conduit for Pandemic Government Polices</h3>The onset of the pandemic witnessed an aggressive government policy response to curb its fallout. &nbsp;A number of policies were enacted that operated through large banks. &nbsp;Examples of such policies would include the government’s Paycheck Protection Program, facilities that were erected by the Federal Reserve to support the financial system such as the Primary Dealer Credit Facility &nbsp;and the Money Market Liquidity Facility, as well as limited duration, and targeted modifications to certain regulations, such as the now-expired exclusion of bank reserves and U.S. Treasuries from the supplementary leverage ratio. &nbsp;In each of these cases, the government’s stated policy objective was to support households and businesses. &nbsp;Large banks participated in these programs as a conduit to channel credit and liquidity into the economy. &nbsp;To analogize, after a hurricane, local governments often hire construction companies to rebuild homes and schools. &nbsp;This rebuilding is necessary to revitalize a battered community and bring it back to life. &nbsp;In the same way, the government’s pandemic policies have buoyed our economy at a time of great need and large banks have been a constructive and important part of that effort.<h3>Conclusion</h3>Across the entire economy all industries work in tandem with government policy to realize the maximum potential of our economy. &nbsp;Large banks are no different from other industries that benefit from all sorts of government policy. &nbsp;The important point is that this partnership between government and industry is an important part of ensuring that the whole economy operates as productively and efficiently as possible.&nbsp; Going forward, large banks will continue to work constructively with the government to realize the maximum potential of our economy. &nbsp;

Pistons or Sparkplugs? How Large Banks and Governments Work Together to Support the Economy

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<ul><li>We hold more than $4.2 trillion in loans, accounting for 40% of total lending to businesses and households.</li><li>We provide more than $679 billion, or nearly half, of all consumer loans by banks in the U.S., supporting everything from the purchase of a new car to furnishing a new home.</li><li>Lending by our institutions accounts for 34% of total commercial and industrial (C&amp;I) lending by banks, helping businesses grow and contribute to the economy.</li><li>We represent a major source of lending to small businesses in communities across the country, holding $126 billion in small business loans&nbsp;and allowing the economy to grow at both a local and national level.</li><li>We also collectively meet nearly three-quarters of the bank funding needs of other financial institutions, supporting community banks, insurance companies and mortgage finance companies, for example, which then provide important services to businesses and households.</li></ul>

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Lending

Our institutions lend to consumers, businesses and other financial institutions, promoting savings and investment that positions individuals and entities at all layers of the U.S. economy for resiliency and success. At the same time, we are supporting consumers, governments, and businesses of all sizes in growing and creating American jobs.

<ul><li>We underwrite nearly three-quarters of debt and equity transactions – such as initial public offerings – among large institutions in the U.S., providing a critical service that other U.S. institutions cannot offer on a similar scale.</li><li>With $4.2 trillion of mutual funds and annuities under management, we support the retirement and other savings needs of many Americans.</li><li>We finance a significant portion of state and local government expenditures for vital projects, like hospitals, roads, bridges, and schools, through $120 billion in municipal securities holdings. Additionally, we support a large portion of federal government expenditures through $1.1 trillion in U.S. Treasury securities holdings.</li></ul>

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Liquid Capital Markets

Our institutions help foster deep and liquid capital markets, ensuring the U.S. government and private institutions are able to effectively finance public spending and investments in the real economy. 

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Our Employees

Our institutions collectively employ more than 750,000 people, offering a variety of benefits and opportunities to help our employees achieve their personal and professional goals.

Forum members increased credit to businesses and households by 10%
to nearly $8.3 trillion in 2020.


Essential to the U.S. Economy

<h3>Introduction</h3>The COVID pandemic created a global public health crisis that quickly morphed into an unprecedented economic shock that has negatively impacted businesses, households, and industries across the globe. &nbsp;As economies have dealt with the pandemic’s fallout, large, internationally active banks have played an important role in helping businesses and households. &nbsp;A new report released by the <a href="https://fsforum.com/">Financial Services Forum</a>, the <a href="https://www.iif.com/">Institute of International Finance</a>, and the <a href="https://www.isda.org/">International Swaps and Derivatives Association</a>, “<a href="https://fsforum.com/a/2101_3683309_FSF_IIF_ISDA_Paper_5_21_21_v30_b456522c82/2101_3683309_FSF_IIF_ISDA_Paper_5_21_21_v30_b456522c82.pdf">The Role of Financial Markets and Institutions in Supporting the Global Economy During the COVID-19 Pandemic</a>,” documents how large, internationally active banks have supported the economy through the channels of 1) extending credit early, quickly, and at scale to companies in need of financing, 2) underwriting debt and equity for public firms and governments seeking to raise funding from primary securities markets, and 3) supporting market liquidity to buttress primary securities markets and aid the risk-management needs of investors. &nbsp;Together, and in concert with a variety of important official sector actions, large banks have strongly supported the global economy during the pandemic. &nbsp;In this post, we provide a brief overview of some of the report’s key findings and conclusions.<h3>The Calm Before the Storm: The State of Large Banks Pre-Pandemic&nbsp;</h3>Large banks, such as Financial Services Forum members, entered the pandemic with robust levels of capital and liquidity that have grown appreciably over the previous ten years. &nbsp;As shown in Figure 1, from 2010 to 2020, Forum member capital grew by 42 percent while liquidity grew by 164 percent. &nbsp;As a result, Forum members and other large banks were well-positioned to absorb and adjust to the initial economic fallout of the pandemic. &nbsp;In this way, large banks played the role of a shock absorber, which helped other industries and people manage the abrupt and significant economic costs of the pandemic. &nbsp;Moreover, while changes to the large bank regulatory regime were one important reason for the enhanced resiliency of large banks, it is also the case that large banks had made significant strides in their own risk, capital and liquidity management practices that served them well as the economy entered the pandemic.<figure class="image image-style-align-center image_resized" style="width:70.58%;"><img src="https://fsforum.com/a/Screen_Shot_2021_05_23_at_10_40_53_PM_279d030009/Screen_Shot_2021_05_23_at_10_40_53_PM_279d030009.png"></figure><h3>The First Leg: Absorbing the Shock in the Immediate Aftermath - A Surge in Large Bank Lending</h3>In the earliest stages of the pandemic, companies everywhere ran into acute funding needs as revenues plummeted and the costs of maintaining operations rose. &nbsp;Companies immediately turned to bank lending to fill the gap between their needs and available resources. &nbsp;Large banks responded by channeling large amounts of funding and liquidity to companies through bank lending - often through the drawdown of existing credit lines.&nbsp; As shown in Figure 2 below, taken directly from the report, large bank lending rose sharply in the early stages of the pandemic. The finding that large banks were the fastest acting and most significant suppliers of credit in the early stages of the pandemic is supported by other <a href="https://www.nber.org/papers/w27256">research</a>. &nbsp;Specifically, economists at Boston College and the Federal Reserve Board studied lending activity in early 2020 and found that large banks with total assets in excess of $50 billion were the largest suppliers of credit during that period.<figure class="image image_resized" style="width:83.53%;"><img src="https://fsforum.com/a/Screen_Shot_2021_05_23_at_10_41_16_PM_fd37768501/Screen_Shot_2021_05_23_at_10_41_16_PM_fd37768501.png"></figure><h3>The Second Leg - the Primary Market Pivot: Large Banks Underwrite a Large Increase in Debt and Equity Issuance</h3>At the onset of the pandemic, securities markets were racked by a bout of illiquidity that severely slowed the pace of issuance and made it difficult for companies and governments – especially municipalities – to raise funding through primary securities markets. &nbsp;Following a number of important official sector programs that were enacted to re-start public securities markets, security issuance increased quickly. &nbsp;Companies then used security market issuance to replace bank lending. &nbsp;Large banks play a key role in intermediating primary securities markets by underwriting debt and equity. &nbsp;As underwriters, large banks commit capital and liquidity to issuers so that they can issue securities into the market at a pre-determined price. &nbsp;Underwriters then sell these securities to pension funds, mutual funds and other investors. &nbsp;In so doing, large banks fill a fundamental role of connecting savers and borrowers in the economy. &nbsp;As shown in Figure 3 below, taken directly from the report, global corporate bond issuance increased by roughly 66 percent over the course of 2020. &nbsp;This funding then directly supported the operation of companies across the globe so that they could continue to keep their doors open, their employees paid, and produce the goods and services that the economy needed.<figure class="image image_resized" style="width:83.15%;"><img src="https://fsforum.com/a/Screen_Shot_2021_05_23_at_10_41_52_PM_4a37bfa5b3/Screen_Shot_2021_05_23_at_10_41_52_PM_4a37bfa5b3.png"></figure>Finally, it is important to highlight that governments – both national and local - also benefitted from increased underwriting by large banks, which helped them to raise the funding needed to support a range of crucial government stimulus and public health programs during the pandemic.<h3>The Third Leg – Maintaining Market Liquidity</h3>The pandemic ushered in a period of significantly heightened uncertainty and risk that immediately increased demands by investors everywhere to hedge and re-evaluate their risks through securities and derivative markets. &nbsp;Large banks act as significant market makers by taking on and deploying securities inventory in response to customer demands. &nbsp;As an example, when risk rises, investors often desire to reduce their risk by selling some or part of their securities holdings. &nbsp;In an environment in which “everyone is selling,” market makers need to be net security buyers because they can’t find enough ready buyers to offset the torrent of sell orders. &nbsp;In this way, large bank market makers act as shock absorbers and help balance the market. Indeed, this very dynamic presented itself from the outset of the pandemic and large banks met client demands to sell by buying large amounts of securities and building their own security inventory. &nbsp;As shown in Figure 4, taken directly from the report, in the case of corporate bonds, large bank dealers steadily built their inventory levels over the course of the pandemic.<figure class="image image_resized" style="width:84.5%;"><img src="https://fsforum.com/a/Screen_Shot_2021_05_23_at_10_42_32_PM_e791d9c3f2/Screen_Shot_2021_05_23_at_10_42_32_PM_e791d9c3f2.png"></figure>Two things are worth noting about the inventory build depicted in Figure 4. &nbsp;First, building inventory during a period of heightened risk means increasing the risk borne by market makers. &nbsp;This increase in risk directly offsets the reduction in risk sought by investors selling their security holdings. &nbsp;During the pandemic, market makers directly assumed risk that would otherwise have been borne by their clients and counterparties.&nbsp; Second, these events did not occur in a vacuum. &nbsp;Over this period, several official sector efforts were put in place that were aimed at supporting secondary market trading and helping large bank market makers to absorb increased trading demands.<h3>Lessons Learned and Future Directions</h3>More than a decade after the large bank regulatory system was first reconsidered, the economy was hit by a purely external or “exogenous” shock that is useful for examining whether the current large bank regulatory regime is achieving all of its stated goals. &nbsp;The early evidence suggests that strengthened capital and liquidity were highly beneficial to the banking system and the economy at the onset of the crisis. &nbsp;At the same time, the performance of the banking sector and financial markets also reveals that some aspects of the large bank regime may not have worked as intended by regulators. &nbsp;In the report, we discuss a range of regulatory issues that deserve careful examination in light of the events of the pandemic. &nbsp;Much of the report’s discussion is directly in line with statements made by government officials and standard-setting bodies such as the Financial Stability Board (FSB). &nbsp;As just one example, we call attention to the concept of “capital buffers” that regulators designed to be drawn down during economic downturns. &nbsp;The available evidence, research and statements by key policymakers suggest that these buffers may not have worked as initially intended by regulators and should be re-examined. &nbsp;We believe that the congruence between the report’s statements and statements made by policymakers and official bodies such as the FSB augur well for a robust, open, and honest evaluation of the large bank regulatory regime. &nbsp;We look forward to participating in that evaluation.<h3>Conclusion</h3>The pandemic has dealt a severe shock that has upended all of our lives. &nbsp;As we have all struggled to cope with the new realities of the past 18 months, it is important to take a step back and consider how different parts of the economy have performed under this unprecedented stress. &nbsp;Our new report, “<a href="https://fsforum.com/a/2101_3683309_FSF_IIF_ISDA_Paper_5_21_21_v30_b456522c82/2101_3683309_FSF_IIF_ISDA_Paper_5_21_21_v30_b456522c82.pdf">The Role of Financial Markets and Institutions in Supporting the Global Economy During the COVID-19 Pandemic,</a>” takes a data-based and analytical approach to assessing the role played by large, internationally active banks in responding to the pandemic. &nbsp;Our findings are that large banks have been an important and constructive part of the global solution to this crisis.&nbsp; At the same time, and importantly, large banks have not operated independently. &nbsp;The large-scale efforts of governments have been paramount to our shared successes. &nbsp;Our main point in this regard is that the role played by large banks has in many respects been complementary to official government actions. &nbsp;As large banks have extended credit, underwritten securities, and enhanced market liquidity, the rest of the economy has been better able to meet the challenges presented by the pandemic.&nbsp; As we move forward and continue to recover from the pandemic, large banks will undoubtedly continue to play a constructive role in concert with governments and other industries. &nbsp; &nbsp;&nbsp; &nbsp; &nbsp;&nbsp; &nbsp;&nbsp; &nbsp;

The Three-Legged Stool: How Large Banks Have Supported the Economy During the Pandemic

<h3>Introduction</h3>Recently, the Federal Reserve published its <a href="https://www.federalreserve.gov/publications/files/202104-supervision-and-regulation-report.pdf">Supervision and Regulation Report</a> and its <a href="https://www.federalreserve.gov/publications/files/financial-stability-report-20210506.pdf">Financial Stability Report</a>.&nbsp; Both of these reports provide important insight into the state of large banks as well as how they are supporting the economy and financial stability.&nbsp; The findings from these official reports show that large banks – and Forum members in particular - have remained strong and resilient during the pandemic while supporting the economy and financial stability.&nbsp; In this post, we highlight some of the key findings concerning large banks from these reports and discuss their implications for the economy and financial stability.<h3>Large Banks Build Capital and Liquidity During the Pandemic</h3>A key finding of the Board’s Supervision and Regulation Report is that large banks remain well capitalized - both in terms of their current level of capital and their resilience against financial stress.&nbsp; More specifically, the report finds that “large financial institutions remain well-capitalized on a current and post-stress basis.”&nbsp; This finding is important because it shows that large bank capital levels can withstand the kinds of unforeseen challenges that are considered by the Federal Reserve’s rigorous stress tests.&nbsp; Indeed, in 2020 large banks underwent two separate rounds of stress tests.&nbsp; In each case, large banks were shown to maintain capital levels in excess of regulatory minima.&nbsp; In the most recent test, which the Federal Reserve completed in December, the large bank, post-stress capital ratio was 9.6 percent, more than twice the regulatory minimum.&nbsp;The Board’s Financial Stability Report similarly recognizes the strong capital position of large banks and Forum members in particular.&nbsp; The figure below, taken directly from the report, shows the Common Equity Tier 1 capital ratio of Forum members (G-SIBs), other Large Banks (Large non-GSIBs), and smaller bank holding companies (Other BHCs) – the blue shaded areas represent recessions.<figure class="image"><img src="https://fsforum.com/a/image_772f349cb6/image_772f349cb6.png"></figure>As can be seen, the data clearly show that Forum members maintain a level of capital in excess of their large bank peers and have also built capital over the course of 2020 during the stresses of the pandemic.&nbsp; Indeed, the experience of the past year represents a real-world stress test that has shown the strength and resiliency of Forum members.Large banks, and Forum members in particular, during the pandemic have also continued to build significant amounts of liquidity, which has been another source of strength and resiliency during these uncertain times.&nbsp; Again, the Board’s Financial Stability Report clearly documents the strong liquidity position of Forum members relative to other large bank peers and the rest of the banking system as depicted in the figure below, which is taken directly from the report.<figure class="image"><img src="https://fsforum.com/a/image_71012dc9d5/image_71012dc9d5.png"></figure>The strong liquidity position of Forum members improves their overall ability to respond quickly to unforeseen shocks and further bolsters the confidence of customers and depositors who have relied upon Forum members during the pandemic to provide them with ongoing and uninterrupted banking and financial services.<h3>Large Banks Support the Economy and Financial Stability</h3>The Supervision and Regulation Report appropriately recognizes the role that all banks have played in supporting the economy during the pandemic.&nbsp; Specifically, the report states that “[b]anks have increased lending, absorbed a surge of deposits, and worked constructively with borrowers.&nbsp;They have also provided access to substantial lines of credit for corporate borrowers and played a significant role in supporting small businesses via the Paycheck Protection Program.”&nbsp; &nbsp;These efforts to support businesses and households have been instrumental in helping the economy to deal with the shock dealt by the pandemic.&nbsp; Another important source of support to the economy and financial stability has been the uninterrupted provision of financial services by large banks during the pandemic.&nbsp; At its core, the pandemic represents a source of operational stress that has disrupted a wide range of industries.&nbsp; The Board’s Supervision and Regulation Report finds that large banks were operationally resilient and able to continue supporting the economy during the pandemic.&nbsp;Specifically, the report finds that “large firms have shown operational resilience to the COVID event, as they have continued to provide critical business services to their clients over the last year.”&nbsp;This finding is important because of the critical importance of financial services to the rest of the economy.&nbsp; Businesses can’t pay their employees and keep their doors open, and families can’t pay their mortgage or pay for groceries without constant and uninterrupted access to financial services.&nbsp; The ability of large banks to continue operating without disruption throughout the pandemic illustrates, again, their resiliency in a real-world stress test and underscores how large bank resilience has contributed to broader financial stability.&nbsp; &nbsp;&nbsp;<h3>Conclusion</h3>The pandemic has dealt a blow to the entire U.S. economy that has subjected all of us to a real-world stress test.&nbsp; The Federal Reserve’s Financial Stability and Supervision and Regulation reports provide valuable insight into the performance of large banks during this difficult period.&nbsp;The reports clearly show that large banks – and Forum members in particular – have remained safe and sound as they built capital and liquidity over the course of 2020.&nbsp; They have also supported the economy by providing much needed credit and supporting their customers.&nbsp; Finally, and importantly, large banks have contributed to broader financial stability through maintaining operational resilience.&nbsp; The ability of large banks to provide uninterrupted financial services to businesses, households and depositors has supported the economy and financial stability by helping the rest of the economy during the pandemic.&nbsp;

Safe and Sound and Supporting the Economy: The Federal Reserve’s View on Large Banks 

<h3>Introduction</h3>There is a perception held by some that banks can’t be trusted to make assessments of their risk profile for fear that they will always underreport their level of risk and “game the system.”&nbsp; This view is often used to support the use of risk-blind capital requirements as well as the use of regulatory risk models instead of bank risk models in the stress tests.&nbsp; More broadly, this view supports a general notion that large bank regulatory capital should be fully prescribed by regulators without any input from banks.&nbsp; In this post, we show that the evidence points to the exact opposite -- bank risk models often show higher levels of risk than that of regulatory risk models.&nbsp; In addition, using the experience of the recent pandemic, we show that bank risk models respond swiftly to increases in risk and uncertainty.&nbsp; These data convincingly show that bank risk assessments respond to increases in volatility.&nbsp; Accordingly, regulators and the public should give greater consideration to bank risk assessments in the regulatory framework.<h3>Standardized vs. Advanced Risk-Weighted Assets</h3>Large banks, such as Financial Services Forum members, are subject to capital requirements that depend on firms’ risk-weighted assets (RWA).&nbsp; RWAs are intended to reflect the relative riskiness of different assets so that the amount of capital required on, say, a U.S. Treasury bond is lower than the amount of capital required on a loan to a fledgling tech start up.&nbsp; RWAs are computed according to two methods: a standardized approach and an advanced approach.&nbsp;The standardized approach is essentially a very large and complex look-up table that assigns a specific risk weight to each asset category.&nbsp; These risk weights do not vary with the risk profile of the underlying asset and are generally quite conservative.&nbsp; As an example, under the standardized approach, all corporate loans receive a 100% risk weight regardless of the history and payment experience of the corporate borrower.&nbsp; Accordingly, a loan to a stable blue-chip company is perceived to be as risky as a loan to a start up company.&nbsp; In addition, banks also compute RWAs according to the advanced approach, which uses bank internal models to assess the risk of an asset.&nbsp; In the case of a corporate loan, the advanced approach considers the financial health and historical experience of a corporate borrower so that borrowers with a demonstrably lower risk profile receive a lower risk weight.&nbsp; What’s more, advanced approach RWA calculations are updated over time as risk conditions change, while standardized risk weights are not.&nbsp; This is important because it implies that advanced approach RWAs have the capacity to respond to a changing risk environment.&nbsp;<h3>Standardized vs. Advanced RWA: What Do the Data Show?&nbsp;&nbsp; &nbsp;&nbsp;</h3>We consider the difference between advanced and standardized RWAs for the Global Systemically Important Banks based in the U.S. – the Forum members -- over the past five years: 2016-2020.&nbsp; As there are eight Forum members and 20 quarters over the past five years, there are 160 bank-quarter observations.&nbsp; In Table 1 we show the number of bank-quarters in which advanced approach RWA exceeds standardized RWA and the number of bank-quarters in which standardized RWA exceeds advanced RWA.&nbsp; As shown in the table, Forum members report advanced RWAs that are larger than standardized RWAs in 73 of 160 bank-quarters.&nbsp; This finding is important as it clearly shows that bank risk assessments are often more conservative than standardized, regulatory risk assessments.&nbsp; Accordingly, a view that bank risk models “always underreport risk” is simply not consonant with the data.&nbsp; Further, the finding that bank risk models are more conservative than regulatory risk assessments nearly half the time is somewhat surprising and illuminating in light of the substantial conservatism built into regulatory risk assessments.<figure class="image"><img src="https://fsforum.com/a/screen_shot_2021_04_28_at_10_40_52_pm_1024x348_545eb9fdc7/screen_shot_2021_04_28_at_10_40_52_pm_1024x348_545eb9fdc7.png" alt=""></figure>&nbsp;<h3>How do Bank Risk Assessments Respond to a Changing Risk Environment?</h3>The oft-used quip that “the only constant in life is change” couldn’t be more true in the context of risk monitoring.&nbsp; Risk changes and often without warning.&nbsp; As a result, it is important that risk assessments maintain sufficient flexibility to respond to changing risk conditions.&nbsp; The recent experience of the pandemic provides an interesting natural experiment that can be used to assess the sensitivity of bank risk models to changing risk conditions.&nbsp;In Figure 1 we show the number of Forum members who reported advanced RWA that were higher than the standardized RWA from the fourth quarter of 2019 through the fourth quarter of 2020.&nbsp; We also show a well-accepted measure of uncertainty – dispersion in professional GDP forecasts from the Survey of Professional Forecasters.&nbsp; When professional forecasters disagree more about the future trajectory of the economy, there is greater uncertainty in the economy.&nbsp; This series is useful for identifying how much risk and uncertainty changed over the course of 2020.<figure class="image"><img src="https://fsforum.com/a/screen_shot_2021_04_28_at_10_41_17_pm_1024x580_9b15da7193/screen_shot_2021_04_28_at_10_41_17_pm_1024x580_9b15da7193.png" alt=""><figcaption>Source: FFIEC 101, Survey of Professional Forecasters</figcaption></figure>&nbsp;As shown in Figure 1, uncertainty clearly rose in the second quarter of 2020 as the virus took hold.&nbsp; As the figure also shows, however, risk and uncertainty have abated since that time.&nbsp; At the end of 2020, risk was somewhat elevated relative to the end of 2019, but not by an unprecedented amount.Looking at the data on bank risk models, we see that the number of Forum members for which the advanced RWA exceeded the standardized amount closely tracks the change in risk and uncertainty.&nbsp; Specifically, in the fourth quarter of 2019, two members exhibited an advanced RWA in excess of the standardized RWA. But in the second quarter of 2020 – when uncertainty was at its peak – this number more than doubled to five of the eight Forum firms.&nbsp; Accordingly, these data clearly show that bank risk models are sensitive to changing risk conditions and bank risk assessments increase when overall risk and uncertainty increases.<h3>Conclusion&nbsp;&nbsp;</h3>Large bank risk assessments are often more conservative than standardized regulatory risk assessments.&nbsp; This in itself is worth noting in light of the intentionally conservative nature of regulatory risk assessments.&nbsp; In addition, large bank risk assessments are sensitive to changing risk conditions.&nbsp; These data clearly show that the notion that bank risk assessments are artificially low and are meant to game the system is incorrect.&nbsp; The data clearly show otherwise.&nbsp; This finding has important implications for how regulators and the public should think about the use of bank models in the regulatory capital framework.&nbsp; Rather than replacing bank risk assessments with standardized regulatory models, regulators should review and consider how bank driven risk assessments can inform and improve the large bank regulatory framework.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;

Bank Risk Models and Reality: Bank Risk Models Do Not “Game the System”

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Kevin Fromer

President and Chief Executive Officer

<h3>Introduction</h3>In the years following the financial crisis and subsequent reforms, much has been written on the work of regulators and banks to improve the resiliency of large financial institutions.&nbsp; Banks have performed exceptionally well during the pandemic, which has served as the first real test of those improvements.&nbsp; Coinciding with that experience, the Financial Stability Board (FSB) released its final <a href="https://www.fsb.org/2021/03/evaluation-of-the-effects-of-too-big-to-fail-reforms-final-report/">report</a> on March 31 evaluating the effects of too-big-too-fail reforms.&nbsp; The FSB wrote that “[t]he evaluation suggests that reforms have reduced systemic risks, enhanced the credibility of resolution and market discipline, and ultimately produced net benefits for society.”&nbsp; It is important to note several key findings in the FSB report that are particularly relevant for U.S. Global Systemically Important Banks (GSIBs), all of which are Financial Services Forum members.&nbsp; Also important is one finding from the study that is drawn broadly and therefore does not reflect the impact of reforms on the U.S. GSIBs.<h3>The FSB Found Clear Improvements to Resiliency, Market Discipline and Resolvability</h3>The FSB report rightly acknowledges the important and successful role played by total loss absorbing capacity requirements (TLAC) in improving the resiliency of GSIBs and improving the credibility of the resolution process.&nbsp; As we have discussed <a href="https://www.fsforum.com/types/press/blog/total-loss-absorbency-and-financial-resiliency/">before</a>, he Federal Reserve requires all Forum members – and only Forum members –&nbsp; to issue significant amounts of long-term debt to external third parties, that can be used to absorb losses and re-capitalize their institutions in the event of outsized financial losses.&nbsp; In this context, private funding is intended to eliminate the need for public funding – a key post-crisis objective.&nbsp; The FSB report shows the significant strides made in the U.S. relative to other jurisdictions.&nbsp; Specifically, the report shows that the amount of TLAC issued by Forum members, relative to their overall size, outpaces that of other jurisdictions.&nbsp; As we stated in our earlier <a href="https://fsforum.com/a/fsf_tbtf_evaluation_0f8fafd515/fsf_tbtf_evaluation_0f8fafd515.pdf">comment letter</a> on the draft FSB report, we believe that it is crucial to recognize important differences in the effectiveness of these and other reforms in the U.S. versus other jurisdictions.&nbsp; The figure below from the FSB report depicts those differences<figure class="image"><img src="https://fsforum.com/a/screen_shot_2021_04_26_at_12_52_17_pm_1024x855_7ab9fe96e3/screen_shot_2021_04_26_at_12_52_17_pm_1024x855_7ab9fe96e3.png" alt=""></figure>The chart shows the average ratio of TLAC to the leverage exposure of GSIBs across major jurisdictions.&nbsp; As can be seen in the chart, in the U.S., Forum members maintain roughly a 13 percent ratio of TLAC to leverage exposure, which is significantly higher than any other jurisdiction.&nbsp; Accordingly, the FSB report notes that Forum members are held to rigorous TLAC standards that surpass those in other jurisdictions.The FSB also points out that market discipline among bank investors has improved markedly.&nbsp; Specifically, the report cites the fact that credit rating agencies have removed their assumption of government support for GSIBs in a number of jurisdictions.&nbsp; Importantly, the U.S. is one such jurisdiction where credit rating agencies have removed the “ratings uplift,” which is the increase in value of a GSIB’s debt associated with an assumption of government support in the event of financial stress.&nbsp;The FSB also found that “[r]isks arising from the shift of credit intermediation to non-bank financial intermediaries should continue to be closely monitored.”&nbsp; The past decade has seen a marked increase in the size of the non-bank financial sector relative to the regulated banking sector and the FSB report discusses the need to closely monitor the risk arising from this trend.&nbsp; Specifically, the report points to evidence from the pandemic that suggests “[t]he acute phase of the financial impacts of the COVID-19 pandemic in March 2020 suggests that some parts of the non-bank financial intermediation sector acted as propagators of the liquidity stress.”&nbsp; As a result, the FSB is continuing to study and assess the impact of the growth of the non-bank financial sector on financial stability.&nbsp; This work is important and we look forward to reviewing its findings.<h3>Funding Costs for U.S. GSIBs</h3>One finding that does not take account of the U.S. experience is the funding cost advantages attributed to GSIBs.&nbsp; The report claims that funding advantages for GSIBs, globally, are no different than they were in 2007.&nbsp; While that may be true in the aggregate for the 30 GSIBs, it is not consistent with the facts and research in the case of U.S. GSIBs.&nbsp;Recent <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3497897">research</a> by economists at Stanford University and Australian National University, convincingly shows that funding costs for U.S. GSIBs have risen significantly since 2007 and have remained elevated since that time.&nbsp; The figure below, taken directly from the research, shows:&nbsp; 1) the funding cost of U.S. GSIBs in the form of credit default swap rates from 2001-2007, and 2) the funding cost of U.S. GSIBs since 2007 (blue line) relative to the funding cost they would have faced had there been no change in funding costs for U.S. GSIBs (red line).&nbsp; The data and analysis in the figure clearly show that funding costs for Forum members have risen substantially since 2007 and have remained elevated over the entire period.<figure class="image"><img src="https://fsforum.com/a/screen_shot_2021_04_26_at_12_54_17_pm_1024x532_d00a913c2a/screen_shot_2021_04_26_at_12_54_17_pm_1024x532_d00a913c2a.png" alt=""></figure>&nbsp;<h3>Conclusion</h3>Without question, the combination of reforms by banks and regulators has significantly improved the resiliency and resolvability of Forum members.&nbsp; And the experience in the U.S. has generally been superior to that of other jurisdictions.&nbsp; The effectiveness of these reforms is also reflected by improved market discipline and increased funding costs for Forum members.&nbsp; The FSB report should give policymakers and the public additional confidence about the strength of the U.S. banking system, which has been strong and supported the economy over the course of the pandemic.&nbsp; &nbsp;

Large Bank Strength and Resilience - A Reaction to the Financial Stability Board Evaluation of TBTF

IntroductionIn December, the Federal Reserve released the second round of stress tests that were conducted in the pandemic year of 2020.&nbsp; The results showed that Financial Services Forum members maintained significantly more capital than was needed to both sustain the severe economic shock contemplated in the December 2020 stress tests and continue supporting the economy.&nbsp; With the release of the stress test results, the Federal Reserve also placed restrictions on bank capital distributions that are not required under existing capital rules.&nbsp; These restrictions will expire on March 31st, unless the Federal Reserve extends them for an additional period of time.&nbsp; The restrictions have been justified by the Federal Reserve on the grounds of unprecedented, elevated economic uncertainty.&nbsp; Current data clearly show that economic uncertainty is no longer elevated beyond its normal range.&nbsp; Extending the restrictions will itself increase regulatory uncertainty, which contributes to economic volatility and creates headwinds for the economy.&nbsp; As a result, the Federal Reserve should allow the existing restrictions to expire at the end of March and rely on the capital framework to govern bank capital distributions.&nbsp; Doing so will bolster the credibility of the stress testing process, reduce economic uncertainty, and provide much needed support to the economy.Forum Members are Resilient to Future ShocksThe pandemic buffeted the economy with an unprecedented economic shock in 2020.&nbsp; Many people were put out of work and many businesses struggled as social distancing measures crimped economic activity.&nbsp; Despite these headwinds, Forum members showed themselves to be resilient to this unprecedented shock.&nbsp; Over the whole of 2020, Forum members increased their level of common equity capital by more than $62 billion, which is roughly an eight percent increase, despite significant economic challenges.&nbsp; What’s more, the forward-looking stress tests released in December 2020 also clearly show that Forum members are resilient and ready to withstand severe economic shocks.&nbsp; In Figure 1, we show the asset-weighted average minimum common equity Tier 1 capital ratio for Forum members and all other U.S. banks subject to the stress tests.&nbsp; This ratio describes the level of capitalization that would result after a bank is hit by the severely adverse shock contemplated by the stress test.&nbsp; The minimum required common equity tier 1 capital ratio is 4.5 percent.&nbsp;<figure class="image"><img src="https://fsforum.com/a/screenshot_274_1024x680_dd89cc918e/screenshot_274_1024x680_dd89cc918e.png" alt=""></figure>As shown in the figure, Forum members exhibited a minimum common equity tier 1 ratio of 9.7% after absorbing all of the losses caused by the stress test’s severely adverse scenario.&nbsp; This capital ratio is significantly larger than that of other U.S. banks subject to the stress tests and more than twice the minimum requirement of 4.5 percent.&nbsp; Forum members began the stress tests with an average common equity ratio of 12.4 percent.&nbsp; The severely adverse scenario reduced this capital ratio by 2.7 percentage points.&nbsp; As a result, the stress test indicate that Forum members could withstand the severely adverse shock one more time and still maintain more than the minimum amount of required capital.&nbsp; Accordingly, the stress tests clearly demonstrate that Forum members are well capitalized and resilient to future economic shocks.&nbsp; &nbsp;Distribution Restrictions and Economic UncertaintyIf Forum members are so well capitalized and resilient to economic shocks, then why did the Federal Reserve impose additional restrictions on capital distributions, such as dividend payments, that are not required under existing capital regulations?&nbsp; While many bank capital experts, such as former Federal Reserve governor <a href="https://www.brookings.edu/blog/up-front/2020/06/25/stress-testing/">Daniel Tarullo</a>, have disagreed with divorcing capital distribution decisions from stringent stress tests, the rationale <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201218b.htm">provided</a> by the Federal Reserve was that uncertainty was so high that they needed to restrict distributions to preserve the resiliency of banks.&nbsp; Accordingly, while the stress tests showed that Forum members have more than enough capital to withstand a severe economic downturn, the Federal Reserve restricted their ability to make capital distributions to shareholders because of heightened uncertainty.So, if unprecedented and high uncertainty is the main justification for these restrictions, just how high is uncertainty now?&nbsp; Thankfully, economists spend a lot of time measuring economic uncertainty and good data exist on this front.Figure 2 shows two widely cited measures of economic uncertainty.&nbsp; The first measure is the implied volatility of the stock market as measured through the options market - the VIX index – and is available since 1990.&nbsp; This index is a widely followed and studied measure of financial market uncertainty.&nbsp; The second measure is the amount of dispersion in professional forecasts of GDP and it is available since 1968.&nbsp; The more professional forecasters disagree about the future path of GDP, the more uncertainty there is in the economy.&nbsp; In Figure 2, we have normalized each series by its average for ease of comparison.<figure class="image"><img src="https://fsforum.com/a/screenshot_275_1024x589_030c80e453/screenshot_275_1024x589_030c80e453.png" alt=""></figure>Source: Federal Reserve Bank of Philadelphia, Yahoo FinanceFigure 2 provides a useful look at economic uncertainty over a long period of time as well as the past year.&nbsp; It is clear that we did experience a sharp spike in uncertainty in the first quarter and second quarter of 2020.&nbsp; Since that time, however, uncertainty has declined significantly.&nbsp; In both the case of the VIX and the forecast dispersion measure, economic uncertainty is now somewhat elevated, but well within its historical range.&nbsp; Indeed, in the case of the macroeconomic forecast dispersion, uncertainty has been higher than the current level of over one-third of the time.&nbsp; In the case of the VIX, uncertainty has been higher than the current level more than ten percent of the time.&nbsp; Accordingly, while the current level of economic uncertainty is somewhat elevated it is not at all unprecedented.Regulatory Uncertainty and the EconomyWhile it may make sense to use “belts and suspenders” in an environment in which uncertainty is at an all-time high and the usual “rules of the road” can’t be fully relied upon, the data clearly show we are not in that situation now.&nbsp; As a result, the Federal Reserve should allow bank capital distributions to be governed by existing bank capital requirements.&nbsp; At the beginning of 2020, the Federal Reserve finished a multi-year effort to reform large bank capital rules though its <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200304a.htm">Stress Capital Buffer</a> (SCB) rulemaking.&nbsp; Moreover, the Federal Reserve’s own analysis showed that the new SCB rule would <a href="https://www.fsforum.com/types/press/blog/leading-from-the-front-us-gsibs-raise-banking-sector-capital-adequacy/">raise capital requirements</a> for Forum members. &nbsp;The SCB has yet to be implemented because the Federal Reserve is limiting distributions via special restrictions rather than the SCB rule.&nbsp; As economic uncertainty has abated, the time to allow the SCB to determine distributions has come.&nbsp; A failure to return to the existing bank regulatory framework will have a significant adverse consequence on the economy.Specifically, a failure to return to the existing bank capital regime creates regulatory uncertainty that itself contributes to economic uncertainty.&nbsp; When banks, investors and markets do not understand the rules of the road, they are unable to make decisions or allocate capital, and the economy suffers.&nbsp; This then creates a negative feedback loop, which only increases economic uncertainty and further depresses economic activity.&nbsp; The negative consequences of regulatory uncertainty are real and well documented.&nbsp; As economists at the University of Chicago, Northwestern University and Stanford University have <a href="https://nbloom.people.stanford.edu/sites/g/files/sbiybj4746/f/qje_bbd.pdf">documented</a>, “Policy uncertainty is associated with greater stock price volatility and reduced investment and employment in policy-sensitive sectors like defense, health-care, finance, and infrastructure construction.”&nbsp; Accordingly, a failure to return to existing and robust capital adequacy guidelines will create unnecessary policy uncertainty that will serve as a further drag on the economy.ConclusionForum members are resilient and strong.&nbsp; The stress tests clearly show their collective ability to withstand stress and serve the economy.&nbsp; There is uncertainty in the economy, but it has declined significantly and today sits within its normal historical range.&nbsp; As a result, the Federal Reserve should allow the temporary restriction that were placed on capital distributions in December 2020 to lapse.&nbsp; Doing so would allow the banking system to return to the existing large bank capital regime, which is robust and has been recently strengthened through the Federal Reserve’s SCB rule.&nbsp; A failure to allow the restrictions to lapse will eventually undermine a consistent bank capital regime that our economy depends upon to allow banks to serve the economy while remaining safe and sound.

Economic Uncertainty, Regulatory Uncertainty and Bank Capital Distributions

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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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