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Sean Campbell

Chief Economist, Head of Policy Research

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Emma Tong

Research Associate, Policy Research

<h3>Introduction</h3>Since the 2008 Financial Crisis, the implementation of the Global Systemically Important Banks (GSIB) framework has become a crucial aspect of financial regulation.&nbsp; GSIB banks, which comprise all Forum members as well as a significant number of large, foreign banks, are subject to an additional capital requirement known as the “GSIB Surcharge.” &nbsp;The GSIB surcharge depends on a large number of technical, data-dependent indicators that form the basis of a “GSIB Score” that then is translated into a GSIB Surcharge.&nbsp; Since the GSIB framework was introduced, GSIB scores have been measured at a quarterly frequency with GSIB surcharges depending on measured GSIB scores at the end of the fourth quarter.Recently, both the Federal Reserve and global regulators through the Basel Committee on Banking Supervision (BCBS) have proposed increasing the measurement frequency of these technical indicators.&nbsp; Under the proposals, GSIBs would be required to measure these indicators at a daily, rather than quarterly, frequency.Why this change to longstanding and accepted practice?&nbsp; Regulators have argued that GSIBs engage in “window dressing” to influence the level of their capital surcharges.&nbsp; More specifically, regulators argue that GSIBs manipulate the level of these indicators at the end of the fourth quarter to achieve temporarily lower scores and surcharges.&nbsp; The BCBS recently issued a staff <a href="https://www.bis.org/bcbs/publ/wp42.htm">working paper</a> making this claim.&nbsp; Relatedly, prior research from the Federal Reserve Board conducted a related <a href="https://www.federalreserve.gov/econres/notes/feds-notes/how-do-us-global-systemically-important-banks-lower-their-capital-surcharges-20200131.html">analysis</a> claiming that U.S. GSIBs have engaged in “window dressing.”&nbsp; As a result, regulators have taken the view that high frequency, i.e. daily, calculation of indicators and scores will counteract window dressing behavior by banks.&nbsp; &nbsp;&nbsp;In this blog, we explore the evidence in favor of window dressing using U.S. data from 2018-2023 that is relevant to U.S. GSIBs (Forum members).&nbsp; The data do not present a clear, compelling, and incontrovertible case for systematic window dressing by U.S. GSIBs.&nbsp; We discuss these results in the context of related economic forces that may be influencing GSIBs and non-GSIBs alike.<h3>GSIB Surcharge Mechanics, Data and Analysis Framework.</h3>As discussed, the GSIB Surcharge is based on each GSIB’s “GSIB Score” as measured at the end of the fourth quarter.&nbsp; Importantly, the resulting GSIB Surcharge remains in force for at least one year.&nbsp; As a result, if a GSIB were able to lower its score temporarily at the end of the year it would benefit as the resulting lower surcharge would persist until, at least, the following year.The Federal Reserve requires that both U.S. GSIBs and non-GSIBs track and publicly report the indicators that are needed to compute the GSIB score on a quarterly basis.&nbsp; As of the first quarter of 2024, 37 banks – the eight Forum members and 29 additional U.S. banks - are required to disclose these data.&nbsp; In principle, non-GSIBs are required to disclose these data in case one of them grows large enough to become a GSIB.&nbsp; Practically speaking, given the current GSIB framework, non-GSIBs are not anywhere close to qualifying as a GSIB.&nbsp; As a result, these banks have no incentive to manipulate or “window dress” their indicators and resulting GSIB scores because they are not subject to the GSIB Surcharge.&nbsp; Accordingly, non-GSIBs and their GSIB scores serve as a useful “control” to compare against the GSIB scores of GSIB banks.&nbsp; Importantly, behavior that is exhibited by both GSIBs and non-GSIBs alike can’t reasonably be attributed to “window dressing” as non-GSIBs have no window dressing incentives.In the analysis that follows we compare the change in GSIB scores from the third to fourth quarter for every bank included in the GSIB score measurement sample from 2018-2023.&nbsp;&nbsp; &nbsp;&nbsp;<h3>GSIB Score Behavior at the End of the Year: GSIBs and Non-GSIBs</h3>Below, we show the percentage change in GSIB scores between the end of the third quarter and the end of the fourth quarter for both GSIBs and non-GSIBs over the 2018-2023 period.&nbsp; Conceptually, the percentage change in score is a natural and relevant measure to assess whether window dressing is occurring because U.S. GSIBs are more complex and have correspondingly larger GSIB scores than their non-GSIB counterparts.The results of this analysis are presented in Figure 1.&nbsp; In Figure 1 we provide a dashed line at a value of zero for reference and comparison.&nbsp; A value that is below zero indicates that the score is declining at the end of the year, consistent with the window dressing hypothesis, while a value that is above zero indicates a rising GSIB score at the end of the year, which would portend a rising surcharge contrary to the window dressing hypothesis.<figure class="image"><img src="https://fsforum.com/a/media/7.16.24-blog-chart-.jpg"></figure>Source: Federal Reserve Y-15The first observation from the results presented in Figure 1 is that both GSIBs and non-GSIBs alike display a significant number of cases in which GSIB scores rise at the end of the year.&nbsp; If GSIB score management is a key consideration for GSIBs, it is hard to understand why we would see their scores rise at the end of the year as a rising score would only tend to increase the resulting surcharge.&nbsp;Looking further at Figure 1 does show that there are also cases in which GSIB scores decline at the end of the year.&nbsp; At the same time, however, the data also show that non-GSIBs exhibit a number of cases in which GSIB scores also decline at the end of the year.&nbsp; To the extent that both GSIBs and non-GSIBs exhibit declining GSIB scores at the end of the year, it is difficult to attribute this behavior to “window dressing” as non-GSIBs have no window dressing incentives.&nbsp;&nbsp;If window dressing were a clear and obvious driver of GSIB Scores for GSIBs at the end of the year, we would expect the data presented in Figure 1 to show a clear and obvious difference in the end-of-year behavior of GSIBs and non-GSIBs – a smoking gun if you will.&nbsp; The data presented in Figure 1 reveal quite the opposite.&nbsp; Both GSIBs and non-GSIBs alike exhibit variable GSIB scores at the end of the year that sometime increase, sometimes decrease, and sometimes stay the same.&nbsp; The data presented in Figure 1 do not present any clear and obvious differences between GSIB and non-GSIB behavior at the end of the year. &nbsp;<h3>Jumping to Conclusions: Conflating Seasonal Effects with Window Dressing?</h3>As discussed, regulators have taken the view that GSIBs actively engage in window dressing and that a regulatory response is required to counteract this behavior.&nbsp; The data presented above tell a much more nuanced story.&nbsp;As presented above there is no incontrovertible evidence to support the window dressing hypothesis. If window dressing is not the motivation of year-end score movements, it begs the question “then what is?”&nbsp;The end of every year is typically characterized by various seasonal or “calendar” impacts.&nbsp; For example, firms of all kinds engage in extensive tax planning and take a variety of tax-related actions at the end of the year.&nbsp; End-of-year accounting management is also widely practiced across a variety of industries including banking.&nbsp; Finally, firms also typically renew and renegotiate customer and vendor relationships at the end of the year in a way that may have impacts on overall activity levels and end-of-year GSIB scores.&nbsp; Regulator statements that end-of-year GSIB scores are driven solely by window dressing fail to consider the fact that the adjustment to banks’ financial positions at year-end may be motivated by a number of legitimate purposes other than lowering GSIB surcharges.&nbsp;This point is especially important as a conceptual matter.&nbsp; Simply because regulators observe GSIB scores declining at the end of the year at some banks does not mean that they can assume that all observed end-of-year GSIB score variation is the result of window dressing.&nbsp; More broadly, observing behavior consistent with a preconceived hypothesis does not “prove” that notion to be true when a variety of other reasons may explain the same observed behavior.&nbsp; &nbsp;Importantly, the previously described research conducted by the BCBS and Federal Reserve failed to consider other important sources of GSIB score variation beyond their previously maintained “window dressing” hypothesis.<h3>Conclusion</h3>Regulator concerns regarding window dressing of GSIB scores are not unequivocally supported by the data.&nbsp; Using regulatory data on both GSIBs and non-GSIBs reveal several similarities in the end-of-year behavior of GSIB scores across both GSIBs and non-GSIBs alike.&nbsp; The data do not present a “smoking gun” in favor of GSIB window dressing.&nbsp; Moreover, neither these data nor the data analyzed in other regulator analyses identify the specific intent underlying observed GSIB score changes and do not adequately address the potential impact of typical end-of-year calendar effects that are frequently observed across a range of industries.&nbsp; Regulator proposals to substantially increase the cost and burden of GSIB score reporting through daily reporting requirements should more carefully consider the various potential causes of observed GSIB score behavior.

Article

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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. 

Federal regulators have failed to review and adjust the calculation of the surcharge to reflect the inflationary effects of overall economic growth, as they indicated it would when the GSIB surcharge rule was enacted in 2015. Since that time, the surcharges for U.S. GSIBs have increased in large part due to economic growth and inflation, which in no way suggests heightened systemic risk.


GSIB Surcharge 

GSIB Scores and Window Dressing: Where is the Smoking Gun?

<h3>Introduction</h3>Each year, the Federal Reserve conducts a stress test of the nation’s largest banks.&nbsp; The results directly determine their capital requirement.&nbsp; When people hear about the stress tests, they naturally think that the stress test results are driven by measurable, concrete factors that contribute to a bank’s risk profile such as exposures to commercial real estate loans or complex financial instruments.&nbsp; While those things matter, the Federal Reserve’s projections for revenues and expenses also play a critical role.&nbsp; In 2024, projected non-interest expense was the single largest driver of the stress test results for Forum members.&nbsp; Projected expenses are, quite unfortunately, one of the least transparent aspects of the annual stress tests.&nbsp; Moreover, expenses are not themselves drivers of risk in the banking sector that should have a first-order impact on capital requirements.&nbsp; This year’s stress test sheds light on the exceedingly opaque nature of the stress tests that contribute to unnecessary and costly volatility in bank capital requirements.&nbsp; The stress tests would be significantly improved with increased transparency as well as a re-evaluation of the process for projecting revenues and expenses in the stress tests.<h3>Expense Projections and the 2024 Stress Tests&nbsp;</h3>Each year, the Federal Reserve’s stress test projects loan and securities losses over a three-year horizon for the nation’s largest banks.&nbsp; These projected losses are driven by the specific exposures that each bank has on its balance sheet as well as the severely adverse stress scenario that is hypothesized by the Federal Reserve each year.&nbsp; A bank with large exposures to a sector that the Federal Reserve decides will be subject to a large shock in the stress scenario will experience elevated projected losses.&nbsp; These losses should be the key driver of risk that would then inform the results of the stress test.Because the stress scenario is assumed to unfold over a very long, three-year, horizon the stress testing procedure must also project and account for revenues and expenses.&nbsp; Over a three-year period, one can’t simply assume that revenues and expenses are zero as net income before loan loss provisions (revenue less expense) adds to the capital base that is eroded by any projected loan and security losses.Below, we show the change between 2023 and 2024 in the most significant components of the stress tests: income, non-interest expense, loan losses, and trading and counterparty losses.<figure class="image"><img src="https://fsforum.com/a/media/7.9.24-blog-chart.png"></figure>&nbsp;Source: Federal Reserve Board Stress Testing Disclosures: 2023-2024As can be seen in Figure 1, the single largest change in the key stress testing components was a nearly $47 billion increase in non-interest expenses.&nbsp; In addition, income rose by roughly $24 billion while loan losses (provisions) increased by roughly $30 billion, and trading and counterparty losses were effectively unchanged.The data in Figure 1 speak to the significance of expense modeling and projections to the stress tests.&nbsp; Since Friday, June 28, 2024, Forum members have publicly announced that the stress tests will increase their stress capital buffer, or SCB, by roughly 0.4 percent on average.&nbsp; Much of this increase can be traced directly to the increase in projected non-interest expense displayed in Figure 1. &nbsp;&nbsp;Given that a bank’s SCB is an integral component in its overall capital requirement, and that capital requirements at banks have a measurable impact on the broad economy, at this point, we should pause and think a little bit about exactly what is going on here.&nbsp; First, what exactly are “non-interest expenses” and second, do they really have any information content about a bank’s risk level that should inform its capital requirement?<h3>Non-Interest Expenses Explained</h3>As the name suggests “non-interest expenses” are those bank expenses besides interest payments made by banks on their deposits and other debt instruments.&nbsp; As an aside, interest expense is typically not broken out separately, but is considered as part of “net interest income” (interest income less interest expenses).&nbsp; Table 1 below shows the main components of non-interest expense as detailed in Federal Reserve <a href="https://www.newyorkfed.org/medialibrary/media/research/epr/2014/1412kovn.pdf">research</a> and also provides a few illustrative examples of non-interest expenses.<figure class="image"><img src="https://fsforum.com/a/media/blog-7.9.24.png"></figure>Source: <a href="https://www.newyorkfed.org/medialibrary/media/research/epr/2014/1412kovn.pdf">Federal Reserve Bank of New York</a>As shown in the table above, the most significant category of non-interest expenses is wages and compensation, comprising roughly 50 percent of all non-interest expenses.&nbsp; Following wages, expenses for real estate and other fixed assets, goodwill, and depreciation costs account for the majority of non-interest expenses.&nbsp; At the micro-level, expenses for things like IT, consulting, and legal fees are also contained in non-interest expense.In light of the constituents of non-interest expense, is there any reason to expect these expenses would be a driver of risk in the banking sector?&nbsp; Any reasonable analysis would clearly indicate that this is not the case.&nbsp; Accordingly, it is hard to understand how the single largest driver of the 2024 stress test results could stem from an increase in costs associated with things like consulting fees, real estate expenses, and the like.Finally, one last conceptual issue with projected non-interest expenses.&nbsp; Apparently, the stress tests assume that non-interest expenses will rise in a stress event.&nbsp; But roughly half of non-interest expense is accounted for by wages.&nbsp; In a period of financial stress, wages are likely to fall and not rise as financial activity grinds to a halt.&nbsp; Even if wages don’t rise, the idea that they would increase markedly is counter to any standard economic theory of supply and demand in the labor market.&nbsp;&nbsp;&nbsp;<h3>Stress Testing Opacity and Non-Interest Expense</h3>As discussed, non-interest expenses are projected in the stress tests due to the very long, three-year, horizon of the hypothesized stress scenario.&nbsp; How exactly then are these expenses projected?&nbsp; The short answer is that nobody, except Federal Reserve staff, knows the answer to that question.&nbsp; Moreover, if loan or security losses are projected to increase, one can at least observe whether a bank has a rising exposure to those assets or whether the scenario posits a particularly challenging economic environment for such assets – as in sharply declining commercial real estate prices.&nbsp; In the case of non-interest expenses, what specific economic indicia would portend sharply rising wages, consulting fees, real estate costs, or IT costs?&nbsp; These sorts of costs are largely unrelated to financial and economic risk, suggesting that the related projections in the stress tests are largely discretionary without being tied to any clear indicators of risk or distress.&nbsp; The resulting projections then naturally result in overly volatile stress test results unrelated to financial risk.&nbsp;On June 26, 2024, the House Financial Services Subcommittee on Financial Institutions and Monetary Policy held <a href="https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=409298">a hearing</a> entitled “Stress Testing: What’s in the Black Box.”&nbsp; In that hearing, the <a href="https://fsforum.com/news/stress-test-process-needs-to-be-more-transparent">Forum</a> and several other experts testified on the concerning nature of an opaque regulatory process that levies capital requirements using non-public, quantitative models that cannot be reviewed, examined, or audited by the public.&nbsp; This year’s round of stress tests adds another clear data point underscoring the urgent need for greater transparency in the stress tests.&nbsp; When stress test results and resulting capital requirements are driven by opaque projections for expenses largely unrelated to financial risk, the entire basis for stress testing is called into question.<h3>Conclusion</h3>The increased severity of this year’s stress test results are being driven by opaque projections for certain expenses that are not generally tied to any reasonable notion of financial risk.&nbsp; As a result, we are witnessing an injection of regulatory volatility via undisclosed and opaque models into regulatory capital requirements that do not serve the public interest.&nbsp; The stress tests should be reformed to be more transparent to the public so that policymakers and the broader public can evaluate whether the stress tests reasonably and realistically assess the riskiness and capital adequacy of our nation’s largest banks.&nbsp;

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Each year, the Federal Reserve tests the ability of large banks to continue to support the economy even in the face of a severe recession far worse than that experienced during the financial crisis.

Multiple hypothetical stress tests, as well as the real-life stress tests of the pandemic and the 2023 regional banking turmoil, have shown that the largest U.S. banks can – and do – act as a bulwark for the economy and the financial sector.

Stress Tests

The Blackest of Black Boxes: The Role of Projected Expenses in the 2024 Stress Test

<h3>Introduction</h3>In a recent Brookings <a href="https://www.brookings.edu/articles/reconsidering-the-regulatory-uses-of-stress-testing/">paper</a>, former Federal Reserve Gov. Daniel Tarullo discussed several potential policy changes to the stress testing regime.&nbsp; Each of the proposals would reduce the transparency of the bank capital regime and inject unwarranted and counterproductive uncertainty into the bank capital process.&nbsp; In this post, we discuss the issue of transparency in the stress tests and comment on the policy changes reviewed in the paper. &nbsp;<h3>Transparent Regulation is a Hallmark of Good Government and Good Capital Policy</h3>In his paper, Daniel Tarullo takes a dim view of transparency in the stress testing process and equates a call for transparency with efforts to “lobby for less dynamism in stress testing.”&nbsp; This claim only seeks to divert attention away from the simple fact that reduced transparency in government regulation is harmful to everyone.&nbsp; It is often said that “sunlight is the best disinfectant” and that a government that operates in the light of day is subjected to vigorous oversight that limits the exercise of arbitrary authority.&nbsp; The notion that the stress tests and financial stability stand to benefit from less and not more transparency stands in clear opposition to decades of experience and common standards of good governance.There is an unstated assumption embedded in the call for less transparency that if banks respond to the design of the stress tests, then they are “cheating.”&nbsp; This viewpoint portrays a deep, serious, and dangerous misunderstanding of how and why banks respond to capital regulation.&nbsp; Bank capital requirements are regulatory pronouncements about risk.&nbsp; Bank assets that are riskier require greater capital to withstand potential losses.&nbsp; Banks respond to capital requirements by trading off the economic benefit of holding the asset with the risk incurred by holding it.&nbsp; If an asset’s risk – either real or as perceived by regulators through capital requirements- increases, then banks have an incentive to reduce their holdings.&nbsp; When a bank engages in this practice it is typically considered good risk management rather than cheating.&nbsp;Moreover, this is exactly the dynamic that is created by existing risk-based capital requirements, or so-called “point-in-time” requirements.&nbsp; If a regulator’s assessment of housing risk results in an increase in housing-related regulatory capital requirements, as has happened in the context of the recent <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230727a.htm">Basel 3 Endgame</a> capital proposal, banks should re-evaluate the tradeoff between the risk and return of holding housing assets.&nbsp; This is how banks manage their risk while allocating bank funding to its most productive use.&nbsp; Indeed, this very fact coupled with the fact that Basel 3 Endgame’s proposed changes are fully transparent has generated quite a lot of useful public comment that will positively impact the final regulation.&nbsp; Much the same would be achieved if the stress tests were subject to the same degree of public transparency.Oddly, there appears to be a belief that adapting to capital regulation in the context of “point-in-time” requirements is fine, but doing so in the context of dynamic capital requirements via stress tests is not.&nbsp; This is incorrect.&nbsp; Banks should respond to capital requirements and risk whether they be static or dynamic.&nbsp; Imagine that a particular coastal area becomes more prone to flooding because of recent beach erosion but insurance companies are not allowed to raise flood insurance premiums and home builders are required to continue building in the area.&nbsp; This would be crazy.&nbsp; Obviously, as conditions change, affected parties judiciously managing their risk should adapt.&nbsp; The notion that this basic truth is reversed in the case of bank capital stress tests is without any logical basis.<h3>More Opacity in Stress Testing Will Not Improve the Stress Tests</h3>Several of the policy options discussed in the paper would increase the opacity of the stress testing regime.&nbsp; Adding more opacity to the stress tests will not improve their ability to measure capital adequacy.&nbsp;Consider the policy option of including “second round effects” in the stress tests.&nbsp; Second round effects encompass a wide array of highly speculative economic impacts that could, hypothetically, be triggered by significant losses in the banking sector.&nbsp; One such example is the idea that significant bank losses would precipitate a wave of asset “fire sales” by banks that would then further depress asset prices and further erode bank capital.Such impacts are an interesting theoretical possibility but are far – far as in lightyears away– from being settled economic science.&nbsp; Economic modeling is quite unlike Newtonian physics.&nbsp; There are no clear and predictable relationships that are observed regularly with high precision that are backed by clear and (nearly) incontrovertible theories.&nbsp; Our ability to predict and model such “second round” impacts is little more than slightly informed guesswork not rooted in any definitive empirical or theoretical body of research.&nbsp; Rather, the inclusion of any such effects would be mere story telling by the unchecked dictate of Federal Reserve staff without any independent oversight on their modeling.&nbsp; Frankly, economists have quite enough trouble accurately estimating the immediate and direct (first round) impact of economic stress on bank capital levels.&nbsp; The idea that we should further complicate that exercise by including fanciful tales about what may or may not happen because of second or third round effects is a dangerous idea that would threaten the validity and empirical rigor of the stress tests. &nbsp;&nbsp; &nbsp; &nbsp;What would be achieved by adding such speculative impacts to the stress tests?&nbsp; More regulatory uncertainty and unchecked discretion thereby allowing regulators to unilaterally determine capital levels without having to explain or justify the rationale for their determinations.&nbsp; If capital is perceived as being too low, just go ahead and fire up the staff’s “fire sale scenario machine” and presto-change-o, new and higher bank capital! &nbsp; &nbsp;The paper discusses similar policy initiatives along the lines of allowing Federal Reserve staff to make frequent and undisclosed changes to the underlying statistical loss models that drive the stress testing process.&nbsp; Imagine such an approach being applied in any other regulatory context.&nbsp; For example, imagine that the government could simply decide to change the rule by which personal or corporate income taxes are determined without revealing these changes to the public.&nbsp; Or imagine that automobile safety standards were changed by the government without informing auto manufacturers of these changes so they could adapt to the new standards?&nbsp; These examples make clear that allowing for undisclosed and unchecked changes to the bank capital regime would only create chaos and frustrate banks’ ability to understand the regulatory landscape, which would impair their ability to channel resources to their highest and best economic use.&nbsp;<h3>Decoupling the Stress Tests from Capital Requirements: Unhelpful Policy Ping Pong</h3>Another policy option discussed in the paper, suggests that the link between the stress tests and capital requirements, that was implemented by the Federal Reserve in 2020 through the stress capital buffer (SCB) rule, should be abandoned.&nbsp; This policy proposal is highly problematic for two reasons.First, such a change would result in the sort of policy ping pong that typifies bad policymaking.&nbsp; Prior to the SCB rulemaking, the stress tests did not have a transparent and well-defined impact on bank capital requirements.&nbsp; At the time, then Governor Tarullo touted the SCB as a means of simplifying and streamlining the bank capital regime while clearly linking capital requirements to the results of the stress tests.&nbsp; Undoing all of that now would simply create more uncertainty in the regulatory process. &nbsp;Surely, ripping the stress tests out of the bank capital framework now would only invite some future policymaker to graft them back on.&nbsp; An ongoing and torturous cycle of – this year they’re in and next year they’re out until they are back in again would wreak havoc on the bank regulatory regime without offering any benefit.&nbsp; Year-to-year gyrations in capital rules generated by needless policy vacillation wouldn’t do anything but create a confused and ineffective regulatory system.Second, de-coupling the stress tests from capital requirements would only invite the sort of secretive “shadow regulation” that endangers the transparent and equitable administration of government. &nbsp;If the stress tests are not part of the formal capital regime that are governed by strict transparency standards, the stress tests could be used as a supervisory cudgel to achieve capital levels that could not otherwise be achieved through consistent and transparent capital regulation.&nbsp; This possibility would be even more likely if the stress tests could be changed and adjusted as regulators see fit without any public oversight.&nbsp; Open and transparent regulation is important to ensure that regulation is always applied consistently regardless of the prevailing winds of the moment.<h3>Conclusion</h3>Transparency in all forms of regulation and government administration is a long held and widely accepted standard of good governance.&nbsp; There is no compelling argument to abandon this transparency principle in the case of bank capital requirements and the stress tests.&nbsp; Banks must understand the capital rules to which they are subject so that they can appropriately allocate funding to its highest and best use for the economy.&nbsp; A regulatory capital regime that purposefully obfuscates the rules will only reduce the ability of banks to effectively allocate capital while creating counterproductive and dangerous policy uncertainty. &nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;

Stress Testing and Star Chambers: Reducing Transparency Will Not Improve Stress Testing 

<h3>Introduction</h3>In a recent Brookings <a href="https://www.brookings.edu/articles/reconsidering-the-regulatory-uses-of-stress-testing/">paper</a>, former Federal Reserve Governor Daniel Tarullo claims that the stress tests have become less “dynamic.”&nbsp; In this post we investigate this claim by analyzing both the inputs and the outputs of the stress testing process.&nbsp; Our data analysis does not support the claim that the stress testing process has become less dynamic in recent years. &nbsp;&nbsp;Relatedly, we address the oft quoted claim that the move to embed the stress tests into the capital regime through the stress capital buffer (SCB) rule reduced capital requirements for Forum members.&nbsp; Quite to the contrary, the Federal Reserve’s own analysis clearly demonstrates that changes made to the stress testing regime as part of the stress capital buffer rulemaking increased required capital for Forum members.&nbsp;<h3>“Dynamism” in the Stress Tests</h3>Daniel Tarullo’s paper opens by claiming that “over time, these factors have made the stress testing regime, and thus the capital requirements coming out of the CCAR and SCB processes, less dynamic and more predictable – that is something closer to a variation on point-in-time capital requirements.”The paper offers little in the way of direct, data-based evidence to support the claim and that may simply be because it’s not entirely clear what it means for the stress tests to be less “dynamic” and more “predictable.”&nbsp;&nbsp; For example, is the concern that the stress tests take place at regular intervals or rely on a consistent set of data, models, and processes to produce the results?&nbsp; Is it because the stress testing process has been formally included as part of rule-based and transparent capital regulation?&nbsp;&nbsp; All of those aspects of the stress testing regime are indeed “routine” and “predictable,” but they are also the hallmark of good, transparent government regulation that is regularly practiced across an array of regulatory contexts whether it be the regulation of banks, airlines, or automakers.To further assess the claim, we have reviewed publicly available data on the annual stress tests between 2011-2023.&nbsp; We assess the dynamism of the stress tests in two specific, and data-based ways.&nbsp; One approach considers the key inputs to the stress tests while the other considers the outputs of the stress testing process.&nbsp;On the input side, we consider the variability in key stress test scenario variables: US Real GDP, EU Real GDP, Unemployment Rate, Stock Prices, House Prices, CRE Prices, Stock Market Volatility, Yield Curve Slope, and BBB Corporate Bond Yields.&nbsp; These are the key macroeconomic scenario variables that are inputs to the stress tests and are under the direct control of the Federal Reserve Board.&nbsp; A less dynamic stress test would be one in which the variability in these key variables declined substantially over time.&nbsp; As an example, if the Federal Reserve stated that the stock market declined (peak to trough) by 50 percent in each stress test, then that would certainly be less dynamic and more predictable.&nbsp; Banks would understand that in the upcoming year’s stress test the scenario will feature a 50 percent stock market decline.&nbsp; Alternatively, a situation in which the scenario’s stock market decline varied consistently from one year to the next - a decline of 40 percent in one year, 50 percent in another and 35 percent in yet another would demonstrate a consistent and healthy amount of dynamism in the stress test’s key inputs.&nbsp; We assess this measure of dynamism by comparing the standard deviation in the peak to trough scenario path for each of the aforementioned scenario variables over two periods: 2011-2016 and 2017-2023.&nbsp; A finding that the volatility of scenario paths had declined significantly in the later period would signal a decline in dynamism.<figure class="image"><img src="https://fsforum.com/a/media/sean-chart-for-dynamism-blog-7.3.24.png"></figure>Source: Federal Reserve Stress Testing Disclosures: 2011-2023In Figure 1, we present the ratio of the volatility of scenario paths for each key stress test variable over the 2011-2016 and 2017-2023 time periods.&nbsp; A value of 1.0 means that the scenario path was just as volatile in the 2011-2016 period as it was during the 2017-2023 period.&nbsp; A value larger (smaller) than 1.0 means that the scenario path became more (less) volatile over the 2017-2023 period relative to the 2011-2016 period.&nbsp; As shown in the Figure, stress scenario volatility is somewhat mixed.&nbsp; Some variables, such as EU Real GDP and BBB Corporate Bond Yields are significantly more volatile in the later period than the earlier period while other variables such as CRE Prices, Stock Prices, and the Unemployment Rate are somewhat less volatile in the later period.&nbsp; Averaging across all variables shows that stress scenario variables are more volatile (1.36) now than they were in the past.&nbsp; Accordingly, a case can be made that the Federal Reserve’s stress scenario process has indeed become more dynamic in recent times.&nbsp;&nbsp;&nbsp; &nbsp;On the output side, we consider the variability in the results of the stress tests.&nbsp; The easiest way to assess output variability would be to compare the variability in stress capital buffers (SCBs) from one year to the next.&nbsp; Given the SCB was first implemented in 2020, we only have a small time series of SCBs so we consider a useful proxy – the ratio of each bank’s stress test losses (losses net of income) to its risk weighted assets.&nbsp; As before, a stress testing regime in which all banks are converging to a constant loss ratio (SCB) – say 4 percent - from one year to the next would signal reduced dynamism while a regime that shows significant variation from one year to the next, 4 percent in one year, 3 percent in another and then 4.5 percent would indicate a healthy degree of dynamism.<figure class="image"><img src="https://fsforum.com/a/media/sean-chart-for-dynamism-blog-part-2-7.3.24.png"></figure>In Figure 2, we present the volatility in our SCB proxy (net stress test loss/RWA) for each year from 2013-2023.&nbsp; As shown in the chart, the volatility of stress test results hovers around two to three percent from 2013-2023 with no clear and significant pattern either up or down over time.&nbsp; Notably, the volatility is as high in 2023 as it was in 2013.&nbsp; Also, the average stress test loss relative to RWA tends to be about one percent, so a volatility of two to three percent is quite significant.&nbsp; Of course, one may claim that the volatility in stress test losses is simply a product of variation in the population of banks subject to the test – some banks have decidedly different risk profiles and business models than other banks and that results in different stress loss results.&nbsp; That is undoubtedly true, but a more fine-grained analysis of stress losses that controls for bank characteristics would be a significantly more complicated and opaque undertaking that would invite other questions.&nbsp; A perusal of actual SCB results over the past few years supports the finding of this analysis.&nbsp; Just looking at the difference between the <a href="https://www.federalreserve.gov/publications/files/large-bank-capital-requirements-20220804.pdf">2022</a> and <a href="https://www.federalreserve.gov/publications/files/large-bank-capital-requirements-20230727.pdf">2023</a> results shows that changes of 50 to 100 basis points in a bank’s SCB are not uncommon.&nbsp; Against this backdrop, it is puzzling to understand exactly what data, analysis or evidence underpins the claim that the stress tests are becoming less “dynamic.”&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<h3>Changes to the Stress Tests Have Raised Capital Requirements for Forum Members</h3>Another claim referenced in the paper is the view that changes to the stress tests that occurred in connection with the implementation of the SCB rulemaking have reduced capital requirements for Forum members.&nbsp; This claim is demonstrably false.&nbsp; Indeed, the Federal Reserve’s own <a href="https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200304a1.pdf">analysis</a> regarding the impact of the rule on the Common Equity Tier 1 (CET1) for Forum members clearly stated that “for GSIBs, the largest and most systemically important firms, the draft final rule would lead to an aggregate increase in CET1 capital requirements of approximately $46 billion, on average, a seven percent increase in their current aggregate CET1 capital requirement.”The above point is exceedingly simple and clear.&nbsp; Forum members face higher capital requirements today because of the SCB final rule than they would have faced had the SCB rule not been adopted.&nbsp; Period.&nbsp; End of story.&nbsp; There is no sense in which the SCB rule reduced capital requirements for Forum members.&nbsp; The opposite is true.&nbsp; Of course, some may have hoped that the SCB rule would have increased Forum capital requirements by an even larger amount but that is a different matter altogether.<h3>Conclusion</h3>The Federal Reserve’s stress testing is far from perfect and could benefit from a number of changes to improve its risk sensitivity and transparency.&nbsp; A lack of dynamism, however, is not a problem for the stress testing regime.&nbsp; In this post we analyzed publicly available data on the stress tests from 2011-2023 to quantitatively analyze the claim that the stress tests have become less dynamic over time.&nbsp; Analyzing both the inputs and outputs of the stress tests between 2011-2023 shows no diminution in dynamism over time.&nbsp; Relatedly, the stress tests have also not resulted in lower capital requirements for Forum members.&nbsp; Rather, and quite to the contrary, Forum members’ capital requirements increased as a result of the change to the stress tests that occurred with the implementation of the Federal Reserve’s Stress Capital Buffer rule.

Pairing Words with Analysis:  The Stress Tests are as “Dynamic” Now as they Have Ever Been

<h3>Introduction</h3>Recently, the Federal Reserve released its semi-annual <a href="https://www.federalreserve.gov/publications/files/financial-stability-report-20240419.pdf">Financial Stability Report</a>.&nbsp; The report is chock full of important insights on the state of our economy and the nation’s largest banks.&nbsp; The report also provides data that clearly demonstrate the problematic nature of recent regulatory proposals, possible forthcoming proposals, as well as regulatory actions that have not been taken, but are having a clear impact on financial stability.&nbsp;&nbsp;&nbsp;<h3>GSIB Capital Levels are at a Multi-Decade High and are Supporting a Strong Banking System</h3>Right off the bat, the overview section of the report states that “the banking sector remained sound and resilient overall, and most banks continued to report capital levels well above regulatory requirements.”&nbsp; The report goes on to focus on the extremely well-capitalized nature of U.S. GSIBs (Forum members), focusing on the Common Equity Tier 1 (CET1) capital measurement, “CET1&nbsp;ratios for global systemically important banks (G-SIBs) reached the highest levels recorded in the past decade, while CET1 ratios for large non–G-SIBs and other bank holding companies were close to pre-pandemic levels.”&nbsp; This statement is also reflected in the chart below taken directly from the report.<figure class="image"><img src="https://fsforum.com/a/media/4.24.24-blog.png"></figure>There are a few interesting observations to make about this chart.&nbsp; First, it clearly shows that U.S. GSIBs maintain capital levels that stand far above that of other U.S. banks.&nbsp; Indeed, judging by the chart, the gap between GSIB and non-GSIB capital ratios is as high now as it has ever been – at least since 2000 (the beginning time period for the chart).&nbsp; Second, while the report states that GSIB capital levels reached their highest level in the past decade, a review of the chart clearly shows a stronger statement applies.&nbsp; Specifically, the chart clearly shows that GSIB capital levels are now higher than they have been in over 20 years.&nbsp; This chart clearly confirms a previous statement by Federal Reserve Chair Jerome Powell that GSIB capital levels are at “<a href="https://www.youtube.com/watch?v=9qoK35C0PuI&amp;t=1060s">multi-decade highs</a>.”&nbsp;&nbsp;And while the report clearly recognizes the strength and stability of America’s banking system, it does identify some potential risks.&nbsp; These risks, however, are largely confined to banks outside the U.S. GSIBs.&nbsp; Specifically, the report points to potential problems in commercial real estate (CRE) lending portfolios.&nbsp; As we have previously <a href="https://fsforum.com/news/fdic-risk-review-the-largest-banks-remain-well-diversified">documented</a>, and is well-recognized by key public sector officials such as U.S. <a href="https://www.reuters.com/markets/us/yellen-sees-more-commercial-real-estate-stress-losses-no-systemic-banking-risk-2024-02-08/">Treasury Secretary Janet Yellen</a>, U.S. GSIBs do not have significant exposures to CRE: "I hope and believe that this will not end up being a systemic risk to the banking system. The exposure of the largest banks is quite low, but there may be smaller banks that are stressed by these developments."Finally, the report points to the possibility of further bank stresses like the stress from last Spring that resulted in a significant reallocation of deposits within the banking system.&nbsp; On this point, too, U.S. GSIBs are not exposed to significant risk because U.S. GSIBs maintain the strongest capital and liquidity levels and are widely and rightly recognized as being a source of strength for the U.S. economy.&nbsp; Indeed, as <a href="https://libertystreeteconomics.newyorkfed.org/2023/05/bank-funding-during-the-current-monetary-policy-tightening-cycle/">research</a> from the Federal Reserve Bank of New York has demonstrated, U.S. GSIBs were the recipients of significant deposit inflows during last year’s brief period of turmoil.&nbsp;Overall, the Federal Reserve’s Financial Stability Report paints a clear picture of the strength, stability, and resiliency of Forum members.&nbsp; Forum members are stronger and more resilient now than they have been in decades and are supporting broad stability in the banking system.&nbsp; And while there are some areas of potential concern, Forum members are not significantly exposed to these risks.&nbsp; Rather, they are a bulwark against these risks that will help to promote a stable financial system in the economy if these risks materialize.<h3>Financial Stability Report Clearly Demonstrates Wayward Regulatory Policy</h3>While the report does not directly address current or expected future regulatory proposals, clear insights gleaned from the report speak volumes about the wisdom of current (and likely future) regulatory efforts.First, the data on current risk-based capital levels speaks for itself and&nbsp;calls into obvious and serious question the current capital proposals that would increase Forum member risk-based capital levels by nearly <a href="https://fsforum.com/a/media/fsf---b3e-comment-letter.pdf">30 percent</a> while having a significantly <a href="https://www.federalregister.gov/documents/2023/09/18/2023-19200/regulatory-capital-rule-large-banking-organizations-and-banking-organizations-with-significant">smaller impact</a> on non-Forum member capital levels.&nbsp; When Forum member capital levels are at multi-decade highs and significantly higher than that of other banks, the zeal to disproportionately raise capital for Forum members is nothing less than a real head-scratcher.&nbsp;&nbsp;Second, while regulators have not issued any proposals regarding liquidity there is an expectation that a proposal will soon be released to revamp the large bank liquidity regime.&nbsp; The Financial Stability Report speaks directly to the wisdom of any such proposal in the following figure reproduced from the report.<figure class="image"><img src="https://fsforum.com/a/media/4.24.24-blog-pt-2.png"></figure>As clearly shown, Forum members (“G-SIBs” on the chart) maintain the highest level of liquidity amongst U.S. banks. When one combines this fact with the fact that Forum members maintained ample liquidity during last year’s banking turmoil, were the recipients of deposit inflows, and supported one smaller failing bank to provide regulators with enough time to resolve it, the evidence is clear that the full suite of liquidity requirements for U.S. GSIBs is providing the resilience that was intended for those firms.However, it is also important not to lose sight of the fact that liquidity regulations are not without cost.&nbsp; Requiring large banks to stockpile ever larger amounts of liquid assets on their balance sheets has the predictable effect of crowding out the provision of credit and lending to the real economy.&nbsp; Every dollar of bank reserves sitting on the asset side of a bank balance sheet crowds out a dollar of lending that might otherwise occur.&nbsp; Indeed, <a href="https://www.nber.org/system/files/working_papers/w30340/revisions/w30340.rev1.pdf">research</a> by Rene Stulz of Ohio State University and others has clearly demonstrated that post-crisis liquidity rules have contributed to a decline in lending by our nation’s largest banks.&nbsp; So, while regulators may propose changes in response to the events of last year, there is no evidence to suggest that these efforts should be aimed at Forum members.&nbsp; Any adjustments should be aimed at addressing the specific problems that led to those failures, improving or utilizing existing regulatory tools, and avoiding steps that further depress large bank lending.Third, and finally, the dog that has not barked.&nbsp; The Financial Stability Report appropriately warns about the lack of liquidity in the U.S. Treasury market.&nbsp; This is a real financial stability risk that has been plaguing our economy for the past several years.&nbsp; Moreover, a lack of strong liquidity in the U.S. Treasury market directly impedes the ability of the U.S. government to raise funding at a time when its financing needs have been growing mightily.The report states: “Treasury market liquidity is important because of the key role these securities play in the financial system. Various measures of market liquidity, such as market depth, suggest that liquidity in the Treasury cash market remained low, although at levels that reflect elevated measures of interest rate volatility… conditions in the Treasury cash market appear challenged and could amplify shocks.”A clear contributing factor driving low Treasury market liquidity is the application of the risk-insensitive leverage ratio to large banks.&nbsp; As we have <a href="https://fsforum.com/news/the-evidence-is-conclusive-treasury-market-liquidity-has-deteriorated-significantly">discussed</a> previously, a risk-insensitive leverage ratio penalizes the holding and intermediation of U.S. Treasuries, which is primarily intermediated by Forum members and a small number of other financial intermediaries.The solution to this problem is clear and well understood.&nbsp; Bank regulators, including the Federal Reserve, should reform risk-insensitive leverage ratio requirements.&nbsp; A variety of external experts, including the Group of Thirty, have publicly <a href="https://scholar.harvard.edu/sites/scholar.harvard.edu/files/stein/files/g30_paper.pdf">called</a> on regulators to take up reform of the leverage ratio.&nbsp; The Federal Reserve itself publicly committed in 2021 to take up leverage ratio reform but no action has been taken since this commitment was announced over three years ago.&nbsp; Given the Federal Reserve’s assertion that U.S. Treasury market liquidity is a clear and present financial stability risk, there is no excuse to continue to delay a reconsideration of the leverage ratio.&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;<h3>Conclusion</h3>The Federal Reserve’s recent Financial Stability Report provides an important and well-supported view on the state of U.S. Financial Stability.&nbsp; The report clearly shows that Forum members are supporting financial stability through their strong levels of capital and liquidity.&nbsp; Equally as important, the report also demonstrates the many problems with recent regulatory proposals, expected future regulatory proposals, and proposals that have been promised but not yet made.&nbsp; The Federal Reserve and other regulators should take stock of its own financial stability assessment as they chart the course for regulatory reform.

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The Forum advocates for appropriate policy and regulation that promotes a strong, diverse financial system and supports the needs of our economy and American competitiveness.

Regulatory, other topics 

Federal Reserve Financial Stability Report Underscores Strength of America’s Largest Banks and Wayward Regulatory Policy

<h3>Introduction</h3>In a recent <a href="https://www.brookings.edu/articles/the-basel-iii-endgame-and-fed-independence/">blog post</a> on the banking agencies’ Basel III Endgame proposal, Wharton Professor Peter Conti-Brown made a number of sweeping assertions about how the Federal Reserve Board should execute its mission that are inconsistent with the Federal Reserve Act and the Federal Reserve’s long-standing practice and that would substantially weaken the Federal Reserve as an institution.&nbsp; In this post, we examine three specific claims made by Conti-Brown and discuss how they are antithetical to both the historical practice and fundamental mission of the Federal Reserve.<h3>The Federal Reserve is Not an Appendage of the Presidential Administration</h3>In his post, Conti-Brown asserted that the Federal Reserve should simply approve the Basel III Endgame proposal because it (supposedly) aligns with the views of the current presidential administration.&nbsp; Specifically, he writes “we must resolve the question of bank capital through a political process— and the voters elected a Democratic president and his appointees to make these decisions.”This statement appears to suggest that the Board is little more than an extension of the current presidential administration.&nbsp; Nothing could be further from the truth.&nbsp; In terms of both its monetary policy and financial regulatory missions, there is nothing in the Federal Reserve Act or in the 111-year history of the Federal Reserve to suggest that this is the case.The Federal Reserve Board is just that – a Board comprised of seven individuals that come from the 12 different Federal Reserve districts and serve lengthy 14-year terms to insulate themselves from short-term political pressures.&nbsp; Indeed, the Board structure of the Federal Reserve is one of its key design features.&nbsp; The drafters of the Federal Reserve Act were wary of the prospect of a centralized decision-making body that was influenced solely by Washington politics.&nbsp; The resulting Board structure was a compromise designed to ensure, as stated in the <a href="https://www.federalreserve.gov/aboutthefed/section10.htm">Federal Reserve Act</a> itself, that the Board benefits from a diverse range of views that give due regard to “financial, agricultural, industrial, and commercial interests, and geographical divisions of the country.”The idea, however, that the Federal Reserve should act as a wing of the administration is not new, though it has been thoroughly discredited.&nbsp; Before 1936, both the Secretary of the Treasury, as Board chair, and the Comptroller of the Currency served as Board members.&nbsp; The outsized influence of administration officials on the Board has been correctly viewed as being a key source of organizational dysfunction that precipitated a series of policy blunders that exacerbated the Great Depression.&nbsp; The Banking Act of 1935 rectified the situation by removing both the Secretary of the Treasury and the Comptroller of the Currency from the Board.Finally, the Federal Reserve Board’s darkest historical episodes are fundamentally tied to an all-too-cozy relationship with the administration.&nbsp; Both the Fed-Treasury accord that resulted in overt government control of interest rates from World War II to the end of the Korean War as well as Former Fed Chairman Arthur Burns’s infamous attempt to use monetary policy to re-elect a sitting president show just how dangerous it is to let the Federal Reserve be guided by an unquestioned allegiance to any presidential administration. &nbsp;Indeed, much economic research has shown that across the globe and over time, central banks that operate free from the strictures of executive political control are best able to achieve their mandates and serve the economy.&nbsp;&nbsp; &nbsp;<h3>Consensus is the Norm on the Federal Reserve Board&nbsp; &nbsp;&nbsp;</h3>Conti-Brown goes on to suggest that the Board should operate on a simple majority wins, winner-take-all basis.&nbsp; Specifically, he writes “the standard that [Vice Chair for Supervision] Barr must face is the simple arithmetic of winning a bare majority of his colleagues.”&nbsp; Such an approach would belie the 111-year history of the Federal Reserve as a consensus-driven body.&nbsp; In Table 1 below, we demonstrate this point by documenting the consensus-driven nature of Federal Reserve Board votes and Federal Open Market Committee (FOMC) interest rate decisions since the 1930’s.&nbsp;The public data on FOMC policy decisions stretches back to 1936 while available data on Board votes only stretches back to 2012.&nbsp; Board votes comprise any vote taken by the Board such as a vote on rule proposals, enforcement actions, and other regulatory matters.&nbsp; In Table 1, we document the percentage of dissents that have occurred at each Board and FOMC vote.&nbsp; We analyze the percentage of dissents rather than the raw number of dissents because the size of the Board (and the FOMC) varies over time.&nbsp; As an example, on a full Board with seven members a single dissent would be recorded as 1/7=14.3%.&nbsp; Obviously, no dissent is recorded as zero percent. &nbsp;&nbsp;As the data in Table 1 clearly demonstrate, consensus is the overwhelming norm.&nbsp; Of course, dissents can and do occur.&nbsp; Dissent is a healthy and natural part of the policy process, but most often the Board works collaboratively towards a consensus without dissent.&nbsp; From 2012 onwards, dissents have occurred on Board votes only five percent (5.2) of the time.&nbsp; Relatedly, a single vote majority on a Board vote only occurred once in 2018 when only three Board members voted on a proposal (2-1 vote).&nbsp; The data for the FOMC are similar.&nbsp; In the entire history of the FOMC there have only been three occasions on which a vote passed by a one vote majority and a single vote majority has not occurred in over 50 years (1973).&nbsp;&nbsp;&nbsp;<figure class="image image_resized" style="width:100%;"><img src="https://fsforum.com/a/media/picture3.png"></figure>The results of Table 1 are not surprising to those who closely follow the Federal Reserve.&nbsp; Indeed, even a casual review of any of the memoirs of past Fed Chairs such as Ben Bernanke, Alan Greenspan, or Paul Volcker would quickly show that the Chair views his or her primary responsibility as one of building consensus on the Board rather than simply “counting votes” to get to a majority.&nbsp; The strong culture of consensus at the Federal Reserve is perhaps its greatest asset.&nbsp; It serves as a shining example of the best kind of policymaking and should not be jettisoned in favor of a strictly partisan decision-making process that yields to short-term political pressures at the cost of making long-term, durable public policy.&nbsp;&nbsp;<h3>The Federal Reserve Board is an Evidence-Based Institution</h3>The most egregious and dangerous assertion made by Conti-Brown is that because the “right” level of capital is a matter of debate, the Federal Reserve should simply abdicate its responsibility and do the bidding of the administration.&nbsp; More specifically, Conti-Brown writes “setting the appropriate level of capital is a judgment call, a line-drawing exercise that depends largely on how one tolerates and interprets risk.&nbsp; That very fact—that the right level of capital will not and cannot suddenly occur to all experts—means that we must resolve the question of bank capital through a political process.”This sentiment is both extremely dangerous and completely misunderstands the approach that the Federal Reserve takes to executing its charge.&nbsp; First, the simple truth is that there is no substantive policy question the Federal Reserve confronts that is not subject to considerable doubt and uncertainty.&nbsp; What is the right level of interest rates to promote growth and stable prices?&nbsp; What is the best way to organize and regulate the payments system?&nbsp; What is the right level of bank capital?&nbsp; If the standard is that every time the Federal Reserve confronts a question without a concrete and indisputable answer it should defer to the administration, then the Board would indeed have very, very little to do.Thankfully, the Board does not operate this way.&nbsp; Rather, the Federal Reserve, across the entire 12-region system, employs thousands of experts: economists, supervisors, lawyers, and a range of other professionals who work tirelessly to grapple with these inherently complex questions.&nbsp; The Board then works with these experts to formulate data-based policy that is informed by evidence that is regularly shared with the public through speeches, testimony, public reports, and rule proposals.&nbsp; The public – including all members of Congress, bankers, non-financial industry representatives, and public policy groups - then has an opportunity to review the evidence and provide feedback to the Board that informs the policymaking process.&nbsp;This public accountability is a hallmark of informed, responsive, and responsible policymaking.&nbsp; As is often said, “light is the best disinfectant.”&nbsp; In the case of the Basel III Endgame proposal, a key concern is that the evidence, data, and transparency that has been provided to support the proposal is not in line with previous practice or the demands of such a sweeping reform.&nbsp; The suggestion that the Board should somehow devolve into a black hole star chamber that treats every important policy decision as a political “line-drawing exercise” is a threat to the very legitimacy of the institution.<h3>Conclusion</h3>The Federal Reserve Board is one of the world’s greatest policy institutions.&nbsp; Its reputation is well-earned from decades of transparent, evidence-based policy making that focuses on the long-term without being driven by short-term political pressure.&nbsp; While it doesn’t always get it right, the broad and consensus-based nature of the Board’s decision-making process is perhaps its greatest asset and should be protected at all costs from those who would rather the Board subjugate itself to the short-term whims of the political process. &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;

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Increases in capital requirements would harm American households, businesses, and the broader economy. Regulators must carefully consider the economic impact of higher capital requirements, because they affect the whole economy, not just banks.

Capital, other topics

The Federal Reserve is a Consensus Body and Should Remain So 

<h3>Introduction</h3>The market for U.S. Treasury securities is the world’s most important financial market.&nbsp; Many if not all financial assets are priced relative to the interest rate that the U.S. government pays to borrow money from the public.&nbsp; What’s more, the health and liquidity of the U.S. Treasury market directly affects the cost of financing the U.S. government’s borrowings, which has become increasingly important as both interest rates and U.S. debt levels have risen substantially over the past few years.&nbsp; At the same time, a mounting body of evidence clearly demonstrates that the health and liquidity of the U.S. Treasury market has deteriorated sharply.&nbsp; In particular, economists at the Federal Reserve Bank of New York in a recent <a href="https://libertystreeteconomics.newyorkfed.org/2024/02/measuring-treasury-market-depth/">blog post</a> explain that Treasury market liquidity and functioning has “been challenged in recent years.”&nbsp; A key factor contributing to the decline in market liquidity is the risk-insensitive leverage ratio that requires banks to maintain the same amount of capital for low-risk Treasury securities as they would for riskier securities such as equities, disincentivizing banks from engaging in the U.S. Treasury market.&nbsp; Others, including prominent economists such as Former Federal Reserve Governor Dr. <a href="https://scholar.harvard.edu/sites/scholar.harvard.edu/files/stein/files/g30_paper.pdf">Jeremy Stein</a> have concluded that a risk-insensitive leverage ratio has contributed to deteriorating Treasury market liquidity, “U.S. Treasury markets is a prime example of a low-risk activity to which banks have been allocating less capital since the SLR [supplementary leverage ratio] was put in place.”&nbsp;Despite these concerns, Federal Reserve Vice Chair for Supervision Michael Barr in a recent <a href="https://www.federalreserve.gov/newsevents/speech/barr20230710a.htm">speech</a> indicated that he was not recommending any changes to the leverage ratio.&nbsp; More specifically, he characterized the evidence that a binding leverage ratio reduces Treasury market intermediation as “inconclusive.”&nbsp; In this post, we briefly review the recent evidence on Treasury market illiquidity, relate these findings to the existing leverage ratio regime, and discuss how regulators can and should adjust policy to improve the functioning and stability of the world’s most important financial market.&nbsp;&nbsp;<h3>Market Depth Signals a Significant Decline in U.S. Treasury Market Liquidity&nbsp;</h3>A market’s liquidity reflects the ability to buy or sell significant quantities with relative ease.&nbsp; A liquid market is one in which a significant buy or sell order does not have an outsized impact on market prices.&nbsp; Moreover, a liquid market is one that facilitates trade, price discovery, and overall market health and stability.&nbsp; One measure of a market’s liquidity is its depth.&nbsp; Market depth refers to the amount of an asset that can be bought or sold at the prevailing price.&nbsp; As an example, if you go to the supermarket to buy bananas that have been advertised as being on sale only to find that there are only a few bunches out on display, the market is not “deep” because your ability to buy bananas is limited by the fact that the store only has a small quantity available.&nbsp; Conversely, if the market had a display case brimming with bananas at the sale price, we would say the market is deep because lots of folks could purchase bananas without any difficulty.Just like the market for bananas, we can measure the depth of a financial market by measuring the amount of an asset that is available to be bought or sold at the best available price.&nbsp; A recent blog post by economists at the Federal Reserve Bank of New York constructed a measure of market depth in the U.S. Treasury market between January 2019 and January 2024.&nbsp; A plot of their findings is reproduced below.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/picture5.jpg"></figure>The first thing to note about this chart is its scale.&nbsp; The scale is logarithmic so that each horizontal line represents an increase of a factor of 10.&nbsp; The chart plots the estimated market depth for three common Treasury bond maturities: two-, five-, and ten-years.&nbsp; As shown in the chart, in January 2019 market depth stood at roughly $100 million.&nbsp; By January 2024, market depth was considerably lower at roughly $25 million.&nbsp; Moreover, the chart shows a clear and steady decline in market depth that is quite consistent and dramatic.&nbsp; Accordingly, this research further underscores a clear and conclusive trend towards deteriorating liquidity and health in the market for U.S. Treasuries.&nbsp; &nbsp;<h3>Large Bank Leverage Requirements Are a Key Factor in Deteriorating Treasury Market Liquidity</h3>The data clearly demonstrate a significant deterioration in Treasury market functioning and liquidity.&nbsp; And while it is surely the case that, like any phenomenon, there are multiple factors at play, the restrictive nature of risk-insensitive leverage ratios is clearly one key factor that has been identified as a source of worsening liquidity conditions.&nbsp; As we have discussed, the Group of Thirty’s 2021 <a href="https://scholar.harvard.edu/sites/scholar.harvard.edu/files/stein/files/g30_paper.pdf">report</a> on the U.S. Treasury market specifically identified large bank leverage requirements as a key factor leading to diminished liquidity.&nbsp; More recently,&nbsp; economists from the Federal Reserve Board published a <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4175429">research paper</a> indicating that “these finding[s] support the hypothesis that banks’ ability to participate in markets for safe assets may be curtailed by leverage regulations.”&nbsp; More recently still, Darrell Duffie of Stanford University presented a <a href="https://www.kansascityfed.org/Jackson%20Hole/documents/9726/JH_Paper_Duffie.pdf">research paper</a> at the 2023 Federal Reserve Jackson Hole Conference that found that: “Since 2007, the total size of primary dealer [large bank] balance sheets per dollar of Treasuries outstanding has shrunk by a factor of nearly four. This trend continues because of large US fiscal deficits and regulatory capital constraints.”&nbsp;As in the case of the data demonstrating lower Treasury market liquidity, the evidence suggesting that leverage requirements are a key factor driving this deterioration is both clear and convincing.&nbsp; While one can credibly claim that there are additional factors helping to determine Treasury market liquidity, it is not defensible to simply state that evidence of leverage as proximate cause is “inconclusive.”<h3>Making Good on Past Promises: The Path to Leverage Ratio Reform</h3>Back in 2021, the Federal Reserve Board <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210319a.htm">announced</a> that it would “shortly seek comment on measures to adjust the SLR [large bank leverage ratio requirement].”&nbsp; In light of the mounting evidence that Treasury market liquidity is continuing to worsen, now is the time for the Federal Reserve to maintain its institutional credibility and make good on its promise to seek comment on adjustments to large bank leverage requirements.&nbsp; To be clear, the stakes are now higher than they have been in the past.&nbsp; As recently disclosed by the <a href="https://www.cbo.gov/system/files/2024-02/59710-Outlook-2024.pdf">Congressional Budget Office</a>, at current interest rates, the U.S. Government will spend more on interest payments on U.S. Treasury securities than national defense or Medicaid in 2024.&nbsp; The importance of a liquid and well-functioning Treasury market is critical to our nation’s future success now more than ever.&nbsp;Finally, one common objection to leverage ratio reform is the argument that recently proposed changes to risk-based capital requirements, ala “Basel 3 Endgame,” will obviate the need for any leverage ratio reform.&nbsp; This argument is deeply flawed on many levels.&nbsp; First, as a pure process matter, the Federal Reserve Board had full knowledge that it would implement Basel 3 Endgame back in 2021 when it committed to seek comment on adjustments to the SLR.&nbsp; Second, the key argument for risk-insensitive leverage ratio requirements is that internal, model-based capital requirements are too easily “gamed” by banks, thus requiring a “rough and ready,” but “un-gameable” leverage ratio as a backstop.&nbsp; As the U.S. Basel 3 Endgame proposal does away with nearly all internal models, if implemented, the basic argument motivating a leverage requirement would no longer exist, suggesting that regulators should take a very hard look indeed as to whether any leverage requirement at all is necessary.&nbsp;<h3>Conclusion</h3>The U.S. Treasury market is the world’s most important financial market.&nbsp; The last few years have seen a steady and clear deterioration in the liquidity and overall health of this market.&nbsp; At the same time, the evidence that risk-insensitive leverage ratios are playing a key role in this troubling trend is clear and conclusive.&nbsp; Rising U.S. debt levels and interest rates heighten the need for regulators to take active steps in the near term to ensure the health, vibrancy and liquidity of the Treasury market.&nbsp; Regulators should quickly seek public comment on adjustments to leverage ratio requirements as they committed to do in 2021.

The Evidence is Conclusive: Treasury Market Liquidity Has Deteriorated Significantly 

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Kevin Fromer

President and Chief Executive Officer

In the current discourse over large bank capital requirements, people across the country have been largely and rightly focused on the tradeoffs between regulation and economic impacts.&nbsp;However, a pernicious argument or two often seeps into public policy debates that distracts us from the real issue, and we encountered one this past week. It goes like this: If capital requirements for the nation’s largest banks are increased, banks could simply shrink their dividends or share buybacks to maintain their lending activity without impacts on pricing. Surprisingly, one regulator recently was quoted as suggesting that banks’ capital distributions policies should change under various capital proposals. That view, if reported accurately, seems totally inconsistent with fundamentals of corporate finance, economics, and bank supervision.&nbsp;Bank regulatory capital policy is about risk, safety, and soundness.&nbsp;Nothing else.&nbsp;It has zero to do with whether banks are profitable or whether firms choose to exchange shares for cash – a trade that results in zero change in the overall value of the bank. Historically, regulators have welcomed private capital and profitability at American banks, which are essential to the functioning of the U.S. economy. It’s unclear why that should change.<h3>A Proposal With a $100 billion Annual Price Tag</h3>Despite clear evidence of the strength of our largest banks, the agencies are proposing an increase in capital requirements of <a href="https://fsforum.com/a/media/key-takeaways-b3e-comments.pdf">30 percent</a>. These same institutions have more than tripled their high-quality capital and undergone annual government-run stress tests, passage of which is necessary before proceeding with dividend and share repurchase plans.Any material increase in required capital would affect the cost and availability of credit and other vital services. Economists agree that increasing bank capital requirements increases the cost of bank lending and <a href="https://www.youtube.com/watch?v=Jc_a9tk6Ojw&amp;t=35s">depresses</a> economic activity.&nbsp;As we have discussed in previous&nbsp;<a href="https://fsforum.com/news/bank-capital-borrowing-costs-and-lending-demand-curves-still-slope-downwards">posts</a>, equity capital is an expensive form of finance, so requiring banks to use more of it raises costs in exactly the same way that requiring a more expensive grade of steel would increase the cost of building a car.&nbsp;Based on a review of independent academic research, the Forum estimates that proposed increases in capital requirements would cost the economy over <a href="https://fsforum.com/a/media/key-takeaways-b3e-comments.pdf">$100 billion per year</a>. The Forum’s calculations are based on impact estimates from 13 separate research studies relating increased capital requirements to economic output.<h3>Majority of Americans are Shareholders</h3>Public companies across industry sectors routinely distribute portions of their earnings to investors; this is the manner by which American companies attract investment so they can grow, create jobs, and compete. Dividends and buybacks rightly benefit shareholders. And the share of Americans owning stocks has been steadily rising. In 2022, 58 eight percent of all U.S. households owned stocks, either directly&nbsp;or indirectly, up from 52 percent in 2016, according to the&nbsp;<a href="https://www.federalreserve.gov/publications/october-2023-changes-in-us-family-finances-from-2019-to-2022.htm">Federal Reserve</a>.Moreover, stock holdings are generally concentrated among households headed by a retiree and dependent on dividends to meet their financial needs. Therefore, money returned to shareholders recirculates throughout the economy.&nbsp;It is our banks’ responsibility to those teachers, first responders, veterans and small businesses who invest in them to always use capital in the most efficient way possible.As Federal Reserve Chair Jerome Powell&nbsp;<a href="https://www.govinfo.gov/content/pkg/CHRG-115shrg32517/pdf/CHRG-115shrg32517.pdf">said</a>:&nbsp;<blockquote>“When a company buys back its shares or pays higher dividends, the resources do not disappear. Rather, they are redistributed to other uses in the economy. For instance, shareholders may decide to invest the windfall in another company, which may in turn make productivity-enhancing investments. Or they may decide to spend the windfall on goods and services that are produced by other companies, who may in turn hire new workers. In these ways, stock repurchases would also be likely to boost economic growth.”&nbsp;</blockquote><h3>The Basel III Endgame Proposal Would Harm Investors</h3>It is important to remember that the capital proposal itself would harm the economy and the very people who rely upon their investments. The market-making capital requirements would increase costs and lead to smaller inventories and less liquid markets, raising costs for companies seeking investment capital and savers looking for a solid financial return on their capital.A number of organizations in the investor community has weighed in on the proposal."The Proposed Rule could result in increased costs and lower returns for pension funds, ultimately harming plan participants, the ERISA Industry Committee <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/2023/2023-regulatory-capital-rule-large-banking-organizations-3064-af29-c-231.pdf">told</a> regulators.“We have deep concerns about the effects of the proposal on pension plans and the participants they serve,” the American Benefits Council <a href="https://www.americanbenefitscouncil.org/pub/?id=FC1DBDF2-EAEE-3AEB-1CF9-D4E120301279">said</a>.&nbsp;California Public Employees' Retirement System argued that Basel III Endgame would <a href="https://www.federalreserve.gov/SECRS/2023/December/20231229/R-1813/R-1813_122223_156398_337073615934_1.pdf">hurt</a> their beneficiaries: "There are unintended consequences in the Proposal… The Proposal would punish CalPERS – and its two million beneficiaries – because it does not issue publicly traded debt securities. That error should be remedied."<h3>Conclusion</h3>The debate on the Basel III Endgame should stay focused on why excessive new capital requirements are being considered, and how they would harm Americans across our economy. Shifting the discussion to irrelevant topics does nothing to further our understanding of the likely costs of proposed capital increases.

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Despite the demonstrated strength of the largest U.S. banks, the Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, on split votes, issued a proposal in July 2023 to increase capital requirements. The proposal offers no reason or justification for material increases in capital requirements and would harm American households, businesses, and the broader economy. 

Given the complexity of the proposal, its many and significant negative impacts, and the lack of evidence in support of its changes, the agencies should repropose the rule and include the motivations, data and analysis that demonstrate the need for proposed changes.

Basel 3 Endgame 

Don’t Confuse Bank Capital and Returns to Investors

<h3>Introduction</h3>Since the release of the banking agencies’ Basel III Endgame capital <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230727a.htm">proposal</a> in late July, it has been suggested that the proposed 20 percent capital increase for U.S. GSIBs is nothing to worry about because “the banks already have enough capital” to satisfy the elevated requirements or, better yet, the banks can retain enough earnings over several quarters to “meet the requirements.”&nbsp; For example, even though minimum requirements are set to increase by roughly 20 percent, say from 100 to 120, some banks already maintain a level of capital in excess of the proposed new requirements, say 125, or maintain enough capital, say 115, such that they would have enough capital by halting payouts and retaining earnings for several quarters and building their capital base to the proposed required level of 120. &nbsp; It is unfortunate that such an important public policy issue has to be clouded by such diversionary rhetoric that is both wrong and wholly irrelevant to the matter at hand.&nbsp; Analogizing to a more familiar economic context, imagine being told that an oncoming tax increase was nothing to worry about because “you already have more than enough money to pay the tax.”&nbsp; Such a non-sequitur does not survive even the most basic economic analysis.&nbsp; In the remainder of this post, we discuss the clear and obvious fallacy behind the claim that proposed increases to required capital are nothing to worry about. &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<h3>Clearing Up Three Misconceptions&nbsp;</h3>The notion that increasing required bank capital is not a problem because the banks already have enough is a dangerous misconception that belies the most basic understanding of banking and capital.&nbsp; Below we explain this fallacy by describing three basic realities of large bank capital.1.&nbsp;Banks not only maintain the absolute minimum level of required capital, they also maintain a buffer over and above minimum requirements because the world is uncertain and they are prudent.Imagine you are driving your car to work, which is 20 miles away and your gas tank has just enough fuel to make it.&nbsp; Most reasonable people would still stop by the gas station and put a few dollars in the tank because you never know what might happen on the way to work.&nbsp; Perhaps you will hit a traffic snarl.&nbsp; Perhaps a road will be closed, and the detour will take you a few miles out of your way.&nbsp;&nbsp; The idea that you should not drive your car with the absolute minimum amount of gas required is common sense. &nbsp;Banks regularly maintain capital over and above the required minimum for exactly the same reason.&nbsp; The future is uncertain and falling below your minimum requirement is very costly because regulators, investors, and depositors all have a very swift and strong reaction to a bank that breaches its minimum capital requirement.&nbsp; Basic risk management demands a better approach to managing capital levels.As a result, banks maintain a cushion, or a “management buffer,” over and above the minimum requirement to guard against unforeseen events that would reduce their capital level.&nbsp; If capital requirements rise, banks respond by increasing their capital to a level that provides sufficient “capital headroom” over and above the new, higher requirement.&nbsp; Going back to the driving example, suppose a driver has a 10-mile safety buffer of gas so that he can drive, say, 30 instead of 20 miles.&nbsp; If the driver gets a call from his boss and is told he needs to drive not to the office but to a client’s office, which is 28 miles away, the driver will put more gas in the tank to ensure he can make it to the client’s office and not get stranded en route even though he has enough gas to travel 30 miles.Claims that banks already have enough capital entirely miss the basic point that banks operate with a management buffer above minimum requirements.&nbsp; Moreover, the precise amount of “extra gas in the tank” that banks maintain depends on the nature of the requirements themselves, the scope for future risks, and a variety of other technical factors.&nbsp; Attempts to judge “how much is enough” by pundits is just garden-variety armchair quarterbacking that adds little to the debate.&nbsp;2.&nbsp;Banks begin responding to anticipated capital increases long before they come into effect.&nbsp; Accordingly, current capital levels represent, at least in part, anticipated future increased capital requirements.A very basic tenet of modern economics is that people base their actions, not on current conditions, but anticipated future conditions.&nbsp; To quote the Great One, hockey legend Wayne Gretzky, “skate to where the puck is going to be, not where it has been.”&nbsp; Banks, like good hockey players, anticipate.&nbsp; In the case of banking, anticipation is critical because many business decisions, such as making a 5-year business loan, tie up a bank’s balance sheet for years.&nbsp; As a result, the bank must account for both current and future levels of required capital.&nbsp; This accelerates the impact and costs of higher requirements on all bank customers and the economy.Banks’ proclivity to adjust capital levels before a rule comes into effect is well understood and clearly documented.&nbsp; A research <a href="https://www.clevelandfed.org/publications/working-paper/2022/wp-2211-the-impact-of-the-basel-iii-reforms-in-the-united-states">study</a> by the Federal Reserve examining the timing of capital impacts related to the prior Basel III capital reform found that “the bank responses we estimate take place well before the Basel III rules started to come into force after 2014, emphasizing the importance of policy announcements in shaping bank behavior.”Claims that banks already have enough capital entirely misses the basic point that current capital requirements already reflect, to at least some extent, anticipated future requirements.3.&nbsp;Capital is the most expensive form of finance.&nbsp; As a result, banks are careful stewards of that precious resource and any bank that maintains unnecessary “surplus” capital on its balance sheet would find itself outcompeted by other banks and shunned by investors.The idea that bank capital is somehow in abundant supply and so greater requirements are of no concern would make some sense if banks regularly maintained purely surplus amounts of capital that had no specific design or purpose.&nbsp; Market competition and prudent financial management, however, ensures that this never happens for the same reason that car companies don’t maintain large, surplus inventories of steel that aren’t needed to meet their production goals.&nbsp; A company that regularly maintained excessive and unnecessary inventories would tie up precious funds that would increase the cost of production.&nbsp; Competing companies would easily undercut the company and investors would soon pull their capital from such a poorly managed company to invest in better run companies.&nbsp; Banks are no different.&nbsp; Banks are careful stewards of their capital resources.&nbsp; As a result, whenever you observe the amount of capital maintained by a bank you are observing the amount that is required to run the bank safely and profitably at that time.&nbsp; Increasing capital requirements would simply place additional upward pressure on the amount of capital required to run the bank and add to the cost of banking and financial services.&nbsp; &nbsp;Claims that banks already have enough capital assume that banks regularly maintain surplus amounts of capital on their balance sheet that have no specific purpose and can be used to fulfill new requirements at no cost.&nbsp; This view of banking is wholly inconsistent with fundamental notions of competition and financial management that are a basic reality of the banking sector.&nbsp;&nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp;<h3>Conclusion</h3>Capital is not a free resource.&nbsp; Suggestions that oncoming heightened capital requirements are nothing to worry about because “banks already have enough capital” is incorrect and fails to recognize basic economic truths about banks and capital.&nbsp; Rather than engage in diversionary rhetoric, we should all focus on the key question at hand – what is the case for higher bank capital requirements in the first place?&nbsp; Regulators have yet to provide any substantive rationale for higher capital requirements for U.S. GSIBs.&nbsp; And rather than engage on this substantive question, it seems that there is now a desire to simply assert that “the banks can afford it.”&nbsp; Making a significant regulatory change without a clearly articulated rationale and simply stating that “it’s not a problem” is poor public policy.&nbsp; The focus should be on the basis for these proposed capital reforms before we all end up paying a cost that may simply be unnecessary.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;

True, True, and Irrelevant: Common Fallacies About Current GSIB Capital and Oncoming Requirements

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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 &amp; 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 &amp; 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 &amp; Casualty Insurance practice. During his tenure with McKinsey, Ron served in the firm’s Boston, New York, and Stockholm offices. Ron received his Bachelor of Arts degree in political science from Syracuse University in 1980 and his Master of Business Administration from Harvard Business School in 1986. Ron serves on the boards of Unum Corp. and Rhode Island Commerce Corporation. He also serves on the boards of Beth Israel Lahey Health, The Boston Foundation, IYRS School of Technology and Trades, Syracuse University and WBUR. Ron’s philanthropic and civic interests include corporate governance, retirement/healthcare policy and funding, education, and climate. He has led several initiatives on gender equality. Ron is a frequent speaker and writer, and an avid offshore sailboat racer.

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Ronald O'Hanley

State Street Corporation Chairman And Chief Executive Officer, Forum Chair

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Citigroup

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

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Jane Fraser

Citigroup Chief Executive Officer, Forum Vice Chair

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Bank Of America

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

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

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

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

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Brian Moynihan

Bank Of America Chairman Of The Board And Chief Executive Officer

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BNY Mellon 

Robin Vince is President and Chief Executive Officer of BNY Mellon and a member of its Board of Directors. Previously, he was Vice Chair of BNY Mellon and CEO of Global Market Infrastructure. In that role, he oversaw BNY Mellon’s Clearance and Collateral Management, Treasury Services, Markets and Execution Services and Pershing businesses. Prior to joining BNY Mellon in October 2020, Robin was the Chief Risk Officer of Goldman Sachs and a member of the Management Committee. He joined Goldman Sachs in 1994 and held many leadership roles, including Treasurer, Head of Operations, Head of Global Money Markets, COO of the EMEA region and CEO of Goldman Sachs International Bank, among others. He served on several key subsidiary boards and governance committees. He was named managing director in 2002 and partner in 2006. Robin is a member of National Geographic Society's Hubbard Council and serves on the Board of Advisors of The Hospital for Special Surgery.

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Robin Vince 

BNY Mellon Chief Executive Officer 

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The Goldman Sachs Group, Inc.

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

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

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

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David Solomon

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

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JPMorgan Chase & Co.

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

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

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

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

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Jamie Dimon

JPMorgan Chase & Co. Chairman And Chief Executive Officer

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Morgan Stanley

Edward (Ted) Pick is the Chief Executive Officer of Morgan Stanley.Before becoming CEO in 2024, Mr. Pick served as Morgan Stanley's Co-President, Co-Head of Firm Strategy and Head of the Institutional Securities Group, overseeing Investment Banking, Equities, Fixed Income, Global Capital Markets and Research.&nbsp;In previous roles, Mr. Pick was Global Head of Sales and Trading, engineering a turnaround of the firm’s Fixed Income Division. As Head of Institutional Equities, he led that business to a leading global position. He also served as Head of Equity Capital Markets, helping the firm actively raise capital during the financial crisis.&nbsp;Mr. Pick joined Morgan Stanley in 1990 and was promoted to Managing Director in 2002. He is a member of the firm’s Board of Directors (2024), Operating Committee (2012), Management Committee (2008) and Morgan Stanley-MUFG Steering Committee (2013).Mr. Pick graduated Phi Beta Kappa from Middlebury College (1990) and received an MBA from Harvard Business School (1994). He is a Trustee at the Metropolitan Museum of Art (2018), and serves on the MET’s Nominating &amp; Governance Committees. Mr. Pick is Chair of the Advisory Board for the Morgan Stanley Alliance for Children’s Mental Health and a board member of the Institute of International Finance.

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Ted Pick

Morgan Stanley 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 &amp; 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 &amp; 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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