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Sean Campbell

Chief Economist, Head of Policy Research

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

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

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


Capital and Financial Stability

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

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

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

<h3>Introduction</h3>The past several weeks have seen heightened volatility in the UK government bond, or gilt, market that has been met with a significant policy response by the Bank of England (BoE).&nbsp; At first, the BoE responded to falling prices and rising yields simply by buying gilts to reduce volatility and raise prices.&nbsp; The second-round policy response was for the BoE to launch a Temporary Expanded Collateral Repo Facility to lend cash in exchange for gilts to banks on behalf of banks’ pension fund clients.&nbsp; This repo facility is potentially important as much of the heightened volatility stems from forced selling by pension funds who bought gilts with borrowed funds and don’t have the liquidity needed to make the required “margin call” when prices fall.&nbsp; The ability to pledge gilt collateral in exchange for cash would allow pension funds to make the required margin calls and maintain their gilt position rather than selling it and creating further downward price pressure.&nbsp;&nbsp;These recent and seemingly unusual events should make all of us ask one simple question ...&nbsp; Why?&nbsp; More specifically, why is the government now engaging in an activity that is typically carried out by the private sector?<h3>The Mystery of Missing Intermediaries</h3>Government bond markets are intermediated primarily by large bank “market makers” that routinely buy and sell government bonds from client end users such as pensions and asset managers.&nbsp; The events of the past few weeks in the U.K. government bond market are unusual and should come as a surprise.&nbsp; Normally, when selling pressures push prices down, market makers deploy their balance sheet to purchase assets, build inventory, and provide liquidity to the market.&nbsp; They provide liquidity to support their clients because market making is a longstanding business activity that mutually benefits market makers and their clients.&nbsp; Clients benefit by having market makers “take the other side” of the trade they wish to make and market makers earn a fee for providing liquidity to their clients.&nbsp; In addition, large bank market makers are also typically significant suppliers of credit to their clients – often in terms of repo financing like the kind now being offered by the BoE.&nbsp;Both the outright government purchases of gilts and the creation of a special facility with the expressed purpose of facilitating bank-client repo financing by the BoE indicates that private market intermediaries are not stepping in to provide liquidity as market forces would generally predict.&nbsp;<h3>A Theory of the Case</h3>Some insight into the present lack of private liquidity provision in the UK government bond market can be gleaned from recent analysis on the effects of the Supplementary Leverage Ratio (SLR).&nbsp; The G30 recently issued a <a href="https://group30.org/publications/detail/5064">report</a> on the liquidity of the U.S. Treasury market.&nbsp; In that report, the authors find that “[i]n large measure because of the massive expansion in recent years of the Federal Reserve’s balance sheet (and the accompanying expansion of central bank balances on bank balance sheets), risk insensitive leverage ratios (notably the Supplementary Leverage Ratio [SLR]) have become the binding regulatory constraint on the allocation of capital for most of the banks whose dealer subsidiaries are the largest providers of liquidity to the Treasury markets.” &nbsp;The G30 report is focused on the U.S. and the U.S. Treasury market, but the same economic forces have been operating across the globe as the SLR is applied internationally and central banks across the globe, including the BoE, have massively increased the size of their balance sheets in the wake of COVID.&nbsp; Indeed, a recent <a href="https://fredblog.stlouisfed.org/2020/02/central-banking-since-1701/?utm_source=series_page&amp;utm_medium=related_content&amp;utm_term=related_resources&amp;utm_campaign=fredblog">analysis</a> showed that the BoE’s balance sheet, as a proportion of GDP, is now larger than it has ever been since 1701! &nbsp; As central bank balance sheets have ballooned, leverage requirements have become more binding, putting pressure on the ability of bank dealers to provide liquidity.The fundamental problem being pointed out by the G30 report is that intermediating government bonds is a relatively low-risk and low-return activity for market making banks.&nbsp; At the same time, the SLR effectively applies the same capital requirement to both low-risk and low-return activities as it does to high-risk and high-return activities.&nbsp; As a result, market makers are disincentivized from investing in and intermediating low-risk and low-return assets such as government bonds because their return on invested capital is higher for higher-risk and higher-return activities.The squeeze put on the intermediation of low-risk and correspondingly low-return assets such as government bonds has been widely understood and studied for some time.&nbsp; Economists such as Darrell Duffie of Stanford University have <a href="https://www.risk.net/cutting-edge/views/2479855/why-the-leverage-ratio-distorts-market-making">warned</a> for years of the oncoming liquidity strains due to the ascendant and increasingly binding leverage ratio.&nbsp; Indeed, even regulators themselves have acknowledged that tighter capital markets regulation may indeed necessitate more official sector intervention to maintain market liquidity.&nbsp; As far back as 2014, the Committee on the Global Financial System (CGFS), a group of central bankers, issued a <a href="https://www.bis.org/publ/cgfs52.pdf">report</a> considering how central banks could ease liquidity strains in a world where private market liquidity provision is more constrained.&nbsp; Indeed, the report highlighted the potential dangers of continued official sector intervention when it wrote that “backstopping market liquidity directly risks structurally distorting economic incentives for market participants and, as a result, could aggravate liquidity illusion,” referring to market participants’ overestimation of market liquidity.<h3>The Next Shoe to Drop?</h3>Predicting the future is a notoriously fraught exercise.&nbsp; As one looks at recent ructions across the pond, however, it is important to ask whether the UK’s government bond market volatility could soon arrive on our own shores.&nbsp; As the Federal Reserve normalizes its balance sheet, it will increasingly rely on the large bank dealer community to intermediate heightened flows in the Treasury market.&nbsp; Large banks operating near capacity coupled with large flows into and out of the Treasury market do provide the necessary preconditions for a liquidity event.&nbsp; More specifically, with less intermediation capacity or “balance sheet” being devoted to government bonds, the impact of any particular shock to the government bond market is likely to be felt more widely and for a longer period of time.&nbsp; Consider the analogy to the effects of a single fender bender on a congested highway.&nbsp; If the highway is uncrowded, a single fender bender goes largely unnoticed.&nbsp; If the highway is packed bumper to bumper, a single fender bender reverberates through the entire traffic jam causing considerably more damage.&nbsp;Treasury Secretary Janet Yellen recently <a href="https://www.yahoo.com/now/yellen-worries-over-loss-adequate-210517210.html?guccounter=1&amp;guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&amp;guce_referrer_sig=AQAAAGCrPM6fQhwkEsyWtG6elk_xN3wVgZS4-_VwDId7sBKBscOO2IdXZ-ySjWGhhV3K_nggIljjMaF3lo86z_q9rN3x2hALmSUgODHD1LlttsHSW818TULuWdOLnloqfoNC-abPLDREBLa2bXO-i75DA6w66l9Uaf4VFDqYQDyKXH5m">recognized</a> the potential for heightened illiquidity in the U.S. Treasury market and connected that possibility to the strains caused by the SLR. Whether such an event occurs is impossible to forecast, but if such an event occurs it is highly likely that the reverberations will be stronger and last longer given current regulatory constraints.&nbsp; It also remains to be seen whether the U.S. would actively step in and replace private sector market makers to restore liquidity while at the same time distorting incentives as presaged by the CGFS.&nbsp; Finally, it should also be noted that the U.S. Treasury has also recently <a href="https://www.reuters.com/markets/us/us-treasury-asks-major-banks-if-it-should-buy-back-us-government-bonds-2022-10-14/">inquired</a> about the prospect of purchasing certain “off-the-run” and less liquid Treasury securities for the expressed purpose of improving Treasury market liquidity.&nbsp; Again, under normal circumstances private markets, not government intervention, would regulate liquidity levels. &nbsp;<h3>Conclusion</h3>The recent bout of volatility in the UK gilt market and associated official sector response raises real questions about the incentives to engage in private market making in the government bond market.&nbsp; The potential for a liquidity pullback in this low-risk, low-return market has been recognized for years.&nbsp; Indeed, the Federal Reserve <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210319a.htm">committed</a> to reviewing the SLR in recognition of exactly this basic concern. &nbsp;And now this important issue is receiving new and justified attention from academic economists, central bankers and other government officials.&nbsp; The increasingly binding nature of risk-insensitive leverage ratios makes private market intermediation less economic and puts more of the onus on governments to maintain market liquidity – especially in low-risk asset markets like government bonds.&nbsp; Regulators should reflect upon recent events in the UK and ask whether current regulations appropriately incentivize the private sector to provide liquidity and whether permanently increasing the government’s role in provision of market liquidity is desirable or justified.&nbsp; Finally, the appropriate role of governments in intermediating our private capital markets is an important public policy question that deserves more attention and consideration from policymakers. &nbsp;

Gilts, Pension Funds and Central Banks: What Goes Around Comes Around?

<h3>Introduction</h3>What happens to the cost and quantity of bank lending when bank capital requirements rise?&nbsp; Among economists, the answer to this question is uncontroversial and informed by fundamental economic theory and rigorous, data-driven analysis.&nbsp; Increasing bank capital requirements increases the cost of bank funding, which is then passed on to borrowers through higher interest rates.&nbsp; Borrowers – both companies and households – then borrow less due to its higher cost.&nbsp; This basic principle is well established and understood by all mainstream economists in the same way that all economists agree that “demand curves slope downwards” – higher prices reduce demand.&nbsp; Of course, economists regularly debate the magnitude of the impact and whether the magnitude varies over time, but the basic premise that raising capital requirements increases the cost of borrowing and reduces lending is not up for debate.&nbsp; In this blog, we briefly review the economic theory behind the idea that increasing capital requirements reduces lending and we point to several recent research papers that quantitatively demonstrate this fact using recent data from the U.S. banking system.<h3>Bank Funding Costs and Borrowing Rates</h3>When a bank makes a loan, it has to charge the borrower an interest rate that covers the cost of procuring the funds that are used to make the loan because “money does not grow on trees.”&nbsp; Banks fund their loans from two sources, 1) debt borrowed from the public largely in the form of deposits, and 2) equity capital from bank investors.&nbsp; It is well known and documented that it is less expensive to procure debt than equity because debt investors are guaranteed to receive their money back before equity investors receive anything.&nbsp; As a result, equity is riskier than debt and commands a premium in the market.&nbsp; Historically, equities tend to earn a rate of return of roughly 10 percent per year. These days, bank deposits earn roughly two percent per year.&nbsp; Accordingly, if a bank takes in $100 in deposits it must pay out $2 per year, but if the same bank issues $100 in equity to investors it will have to pay out $10 per year.Bank capital requirements dictate how much equity and how much debt (or deposits) a bank must use in funding its lending operations.&nbsp; The table below illustrates the cost of funding at two banks.&nbsp; A bank with a 10 percent capital requirement (Bank 10) and a bank with a 20 percent capital requirement (Bank 20).<figure class="image"><img src="https://fsforum.com/a/media/blog-chart.png"></figure>As shown in the table above, the bank with the higher capital requirement has a higher funding cost because it is required to use more equity.&nbsp; Accordingly, a bank that is required to maintain a capital requirement of 20 percent would need to charge at least another 0.8% (3.6-2.8=0.8) to a borrower to simply cover the higher funding cost of the loan.&nbsp; This is directly analogous to a car company that is told that it has to use a higher and more expensive grade of steel in building its cars.&nbsp; A higher cost of production translates directly to a higher cost to consumers.<h3>A Common Objection Debunked</h3>The logic of the previous example is often questioned by some who cite the “Modigliani and Miller,” or simply, “MM,” theory of capital structure.&nbsp; The MM hypothesis states that as a company, any company, uses more equity to finance its operations, the debt of the company becomes safer because there is a larger cushion of equity to absorb any losses that improves the protection afforded to debt holders.&nbsp; The MM hypothesis then goes on to demonstrate that under very specialized and idealized conditions that are never met in reality, the reduction in the cost of debt would exactly offset the increased cost of requiring more equity financing.&nbsp; In this highly specialized situation higher capital requirements have no impact on the cost of lending.Those that cite this theory, however, rarely mention that this result is only true if the following two conditions hold:<ol><li>Debt payments are not tax deductible.</li><li>A company’s bankruptcy is costless in the sense that once the bankruptcy occurs the company’s assets can be sold and utilized by other companies with no loss in productivity.</li></ol>Neither of the above conditions hold in the U.S. economy.&nbsp; Interest payments on debt are tax-deductible and create a valuable “tax shield” and the costs of bankruptcy are significant as can be attested to by anyone who has witnessed the impact of bankruptcy waves on the economy during a recession.&nbsp;Economists that have <a href="https://www.piie.com/publications/working-papers/testing-modigliani-miller-theorem-capital-structure-irrelevance-banks">studied</a> the MM hypothesis have come to the conclusion that, at best, only about one-half of the reduction promised by the idealized MM theory is realized in practice.&nbsp; In the context of the previous example, this would imply that the bank with higher capital requirements would need to increase the cost of borrowing by 0.4 percent instead of 0.8 percent.<h3>What Does the Evidence Show?</h3>Economics is a great discipline because, out of necessity, it marries theory with empirics.&nbsp; Economists simply have too many competing theories and need to turn to the data to discern which theories best explain the data. &nbsp;So, what does the evidence say about bank capital requirements and bank lending?&nbsp; Thankfully, economists have spent a considerable amount of time studying this issue and there is a lot of research to consider.&nbsp; Below, we briefly cite and summarize a few research papers that well characterize the range of findings in this area.<ul><li>One recent <a href="https://onlinelibrary.wiley.com/doi/abs/10.3982/ECTA16438">paper</a> presents a full-blown macroeconomic model that is estimated using a rich array of data on the U.S. banking system and the economy.&nbsp; A key finding of the paper is “policies requiring intermediaries to hold more capital reduce financial fragility, reduce the size of the financial and non-financial sectors, and lower intermediary profits.”&nbsp; Of course, reducing the size of the financial and non-financial sectors is a direct result of reducing banks’ balance sheet assets (loans), which in turn results in fewer financed assets in the non-financial corporate sector.&nbsp; Interestingly, this paper also finds that pre-crisis capital requirements were “optimal” in the sense that they appropriately balanced increased safety with the lost economic activity that comes from higher requirements.</li><li>Another <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3134262">paper</a> looks specifically at small business lending and finds that banks subject to heightened capital requirements through the Federal Reserve’s stress tests raise the cost of small business loans and provide fewer loans.&nbsp; Specifically, they find that “Banks affected by stress tests reduce credit supply and raise interest rates on small business loans.”</li><li>Finally, a third <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3827246">paper</a> focuses even more specifically at lending to hospitals.&nbsp; The researchers show that the treatment of loans to hospitals in the stress tests increased the effective capital requirement applied to hospital loans.&nbsp; As a result, the researchers find that hospitals faced higher borrowing costs, received fewer bank loans and had to make use of more expensive forms of credit.&nbsp; Specifically, the researchers find that: “Bank stress tests constitute a negative credit shock to their connected hospital borrowers.&nbsp; In particular, we find that loan spreads increase while loan amounts decrease for affected hospitals.”&nbsp; Interestingly, these researchers also find that the need to use more expensive financing had a measurable and negative impact on hospitals and their patients.</li></ul>These research papers are themselves part of a broader set of academic, data-driven research demonstrating that higher capital requirements raise borrowing costs and depress lending.<h3>Conclusion</h3>Coming to terms with the basic reality that increasing capital requirements reduces lending and economic activity is important in the present situation.&nbsp; Recently, Michael Barr, the Federal Reserve’s Vice Chair for supervision, gave a <a href="https://www.federalreserve.gov/newsevents/speech/barr20220907a.htm">speech</a> in which he indicated that new capital rules would soon be proposed.&nbsp; In addition, we have recently seen a hefty increase in capital requirements in this year’s round of stress tests and further capital requirement increases are expected in early 2023 as a result of planned increases to the GSIB surcharge.&nbsp; As new rules are rolled out, regulators should carefully consider their overall impact on the economy and economic activity. And that is more so the case when the economy is facing headwinds as is now the case.&nbsp; All banks require robust capital levels to promote a safe and sound banking system and Forum members support strong capital levels.&nbsp; Today, Forum members maintain nearly a trillion dollars in capital, a marked increase over the past several years.&nbsp; At the same time, capital is not a free economic resource and at some point, further increases in capital result in little improvement in safety and mainly depress economic activity.&nbsp;&nbsp;

Bank Capital, Borrowing Costs, and Lending: Demand Curves Still Slope Downwards

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Michael Chasen

Research Associate, Policy Research

<h3>Introduction</h3>More than half of all Americans work at small businesses, making these companies vital to the growth and success of the American economy.&nbsp;Though small businesses are generally profitable and vibrant in a healthy economic environment, economic downturns or periods of uncertainty bring challenges that can force them to shut their doors forever. Unlike larger businesses, small business owners simply do not have pockets deep enough to withstand extended periods of adversity. In these circumstances, healthy, well-capitalized banks support entrepreneurs through lending. In this post, we review how the events of the past few years have showcased the substantial contributions of Forum members in supporting small businesses, and the economy.&nbsp; &nbsp;&nbsp;<h3>Forum Members’ Steady and Growing Support for Small Businesses</h3>Figure 1 reports the total amount of outstanding small business loans in each year – small business loans are defined as those loans less than $1 million.&nbsp;As the figure clearly shows, Forum member loans to small businesses have grown steadily over time. Importantly, at the onset of the pandemic, lending to small businesses increased dramatically – in part due to their participation in the government’s Paycheck Protection Program (PPP) - to meet the rapidly growing needs of small businesses across the country.&nbsp;Forum members helped these businesses through a time of economic uncertainty and lockdowns, increasing their small business lending between 2019 and 2020 by 38 percent. In 2021, as some of the uncertainty passed and the economy began opening up again, small businesses repaid previously borrowed funds, and small business PPP loans were forgiven. As a result, the outstanding amount of small business loans fell relative to the 2020 pandemic year, but have remained elevated.&nbsp;&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-09-19-at-9.57.35-am.png"><figcaption>Source: Second quarter Call Report data, available at <a href="https://cdr.ffiec.gov/public/PWS/DownloadBulkData.aspx">https://cdr.ffiec.gov/public/PWS/DownloadBulkData.aspx</a></figcaption></figure><h3 style="text-align:justify;">&nbsp;</h3><h3>Forum Members Strongly Supported the Paycheck Protection Program (PPP)</h3>As discussed, Financial Services Forum members also played an instrumental role in the government’s Paycheck Protection Program (PPP). The PPP program was a key element of the government’s pandemic response that was aimed at providing forgivable loans to small business in need of emergency funding during the pandemic. Over the course of the program, Forum members facilitated over $94 billion in loans to well over 1 million recipients andmore than half of Forum member loans were for less than $25,000.&nbsp; In addition, on average, each loan supported roughly 10 jobs, demonstrating the extent to which these loans supported small businesses throughout the country.&nbsp; The PPP program was also a success in supporting a wide array of industries.&nbsp;Figure 2 below shows the number of Forum PPP loans made to different industry sectors.&nbsp; As the chart shows, Forum members channeled small business loans to a wide array of industries, many of which were crucial to addressing the pandemic, such as health care and transportation services.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-09-19-at-9.58.58-am.png"><figcaption>Source: SBA PPP All loan data available at <a href="https://data.sba.gov/dataset/ppp-foia">data.sba.gov/dataset/ppp-foia</a></figcaption></figure><h3 style="text-align:justify;">&nbsp;</h3><h3>Small Business Lending All Across the USA</h3>Figure 3 provides even more granular data on Forum member small business lending, showing exactly where these loans are going. The figure shows per capita small business lending by Forum members across the United States through 2020. This geographic look at the data highlights that Forum member small business lending is making a difference all across the country, not only in a few areas. In particular, significant amounts of small business lending can be seen in all regions of the country.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-09-19-at-10.00.38-am.png"><figcaption>Sources: FFIEC Community Reinvestment Act, available at&nbsp;<a href="https://www.ffiec.gov/cra/default.htm">https://www.ffiec.gov/cra/default.htm</a>, U.S. Census Bureau County Population Totals, available at <a href="https://www.census.gov/programs-surveys/popest/data/data-sets.html">https://www.census.gov/programs-surveys/popest/data/data-sets.html</a></figcaption></figure><h3 style="text-align:justify;">&nbsp;</h3><h3>Beyond the Numbers: How Forum Members are Supporting Small Businesses</h3>The data we have shown are impressive, but it is also helpful to look at some specific and clear examples of how Forum members are making a difference to small businesses. Below, we detail a handful of specific examples that provide greater context for the broader trends we have discussed.<ul><li>At the start of the COVID-19 pandemic, Bank of America partnered with State Street and several other organizations to create <a href="https://www.smallbstrong.com/">Small Business Strong</a>, a non-profit that provides online resources and personalized consulting services to Massachusetts small businesses (particularly women and minority owned), free of charge. Since its creation, Small Business Strong has helped nearly 2,000 Massachusetts small businesses.</li><li>In July 2021, the Citi Foundation’s <a href="https://www.citigroup.com/citi/foundation/programs/smallbusiness.htm">Small Business Technical Assistance Initiative</a> provided $25 million in unrestricted funding to 50 community organizations, supporting each group in their missions of helping small businesses owned by people of color through lending, training programs, pro bono legal and marketing services, and technical assistance.</li><li>From March 2020 to June 2020, Goldman Sachs committed $750 million to fund PPP loans through Community Development Financial Institutions (CDFIs), and launched partnerships with the National Urban League and the U.S. Hispanic Chamber of Commerce to “ensure that both capital and information reach minority-owned businesses.” Goldman’s <a href="https://www.10ksbapply.com/">10,000 Small Businesses Program</a> continues to provide training and coaching to small business owners, who see significantly increased rates of hiring, expansion, and business success after graduation.</li><li>In February 2021, JPMorgan Chase pledged $350 million over five years to aid Black, Latino, women-owned, and other small businesses in their recovery from the COVID-19 pandemic, and to grow these businesses with the aim of addressing the racial wealth divide. As a part of this commitment, JPMorgan Chase is expanding <a href="https://www.jpmorganchase.com/news-stories/how-39mm-loan-fund-is-helping-underserved-entrepreneurs-grow">the Entrepreneurs of Color Fund</a> in collaboration with the Local Initiatives Support Corporation and a nationwide network of CDFIs.</li><li>Morgan Stanley announced the creation of its <a href="https://www.morganstanley.com/about-us/supplier-diversity/small-business-academy1">Small Business Academy</a> in early 2022, with the inaugural class beginning its virtual learning experience in late April. The Academy was established to empower diverse-owned small-business leaders by helping them to expand their professional networks and strengthen their business acumen.</li><li>Over the past two and a half years, the Wells Fargo <a href="https://www.wellsfargo.com/biz/help/open-for-business-grants/">Open for Business Fund</a> has provided over $400 million in grants to CDFIs and donations to nonprofits to support small businesses with technical assistance. Wells Fargo estimates that the Open for Business Fund has served 150,000 small businesses, with the majority of those owned by Black, Hispanic, Native American, and/or Asian American entrepreneurs.</li></ul><h3>Conclusion</h3>Small businesses are vitally important to the American economy and American small businesses have deftly navigated a number of significant challenges in the past few years. In that time, Forum members have supported small businesses across the country by ramping up their small business lending, initiating specific and purposeful financial programs aimed at benefitting small businesses, and facilitating the government’s PPP program.&nbsp;While there is still work to do in improving the economy for the future, Forum members have been vital to the recent success of America’s small businesses and look forward to supporting them in the future.

Large Banks and Small Businesses: Supporting Small Businesses All Across the Country

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

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Lending

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

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

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Liquid Capital Markets

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

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Our Employees

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

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


Essential to the U.S. Economy

<h3>Introduction</h3>Large companies in the U.S. that compete all over the globe – companies that run that gamut from the likes of Boeing to Coca-Cola - require steady access to sophisticated financial services that can be tailored to the complex and global needs of their businesses.&nbsp; These services, such as foreign currency and derivative services, are critical to ensuring that U.S. companies operating overseas can compete effectively with their foreign counterparts.&nbsp; Even smaller companies that generate sales and operate overseas need such services to effectively function and compete abroad.&nbsp; Financial Services Forum members operate globally and offer a wide range of financial services that help U.S.-based firms compete effectively in a world that is increasingly characterized by less cross-border lending from large banks abroad as well as foreign “national champion” competitors that are actively supported by foreign government policy.&nbsp; Forum members, as global banks that have deep expertise in foreign markets, are uniquely positioned to support large, U.S. companies competing abroad and contribute to their success on the world stage.<h3>The Decline in Cross-Border Lending</h3>For more than a decade there has been a steady decline in cross-border lending and banking.&nbsp; More specifically, the amount of lending provided by banks in one country to companies in another country has steadily declined.&nbsp; Figure 1 depicts the total amount of outstanding cross-border loans made by banks from 2008-2022.&nbsp; As shown in the figure, the amount of cross-border lending has declined from roughly $20 trillion to $14 trillion since 2008.&nbsp; As a result, large U.S. companies operating overseas must look to U.S. banks to fulfill their financing needs as well as their needs for other financial services that are critical to their success in foreign markets.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-09-09-at-10.35.35-am.png"><figcaption>&nbsp;Source: Bank for International Settlements</figcaption></figure>&nbsp;&nbsp;<h3>Forum Leadership in Global Financial Services</h3>While large U.S. companies such as Boeing and Coca-Cola require bank loans, they also demand a range of additional, sophisticated financial services that are largely provided by large, global banks, such as Forum members.&nbsp; As an example, Coca-Cola may need to purchase goods in foreign countries to support its operations.&nbsp; To make those purchases, Coca-Cola will need to transact in a foreign currency and will need a bank that can make large volumes of foreign currency payments.&nbsp; Coca-Cola may also need to risk manage its exposure to foreign currency fluctuations by using foreign exchange derivatives and will need to work with a bank that has expertise in the complex field of derivative risk management.In Figure 2 below, we show the amount of foreign currency payments and the amount of derivative activity conducted by Financial Services Forum members and all other large U.S. banks.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-09-13-at-8.45.08-am.png"><figcaption>Source: FR Y-15, FR Y-9C</figcaption></figure>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As can be clearly seen in the figure, Forum members are the dominant providers of foreign currency payments and derivative services.&nbsp; These services are critical to maintaining the competitive position of large U.S. firms operating overseas.&nbsp; In particular, a large U.S. company that is unable to competitively manage its foreign currency expenditures abroad would find it difficult -- if not impossible -- to compete with local firms that bear no foreign currency risk whatsoever.&nbsp; Moreover, operating in foreign markets requires a degree of insight and expertise that can only be achieved by global firms that continuously operate in those foreign markets.&nbsp; Among U.S. banks, Forum members stand alone in their foreign market footprint and expertise.<h3>Beyond Lending: Raising Capital from Public Markets</h3>While large U.S. companies do need bank lending, a large amount of their financing comes from their own issuance of debt and equity securities in our public capital markets.&nbsp; This source of funding is critical to ensuring a steady flow of finance that can be used to make needed investments overseas to remain competitive with foreign competitors.&nbsp; In Figure 3, we show the combined amount of debt and equity underwriting provided by Forum members and other large, U.S. banks.&nbsp;&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-09-09-at-10.36.11-am.png"><figcaption>&nbsp;Source: FR Y-15</figcaption></figure>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As shown in the figure, Forum members account for the lion’s share of underwriting activity among U.S. banks.&nbsp; This form of support to large, U.S. companies operating overseas is important for maintaining international competitiveness as some foreign competitors may benefit from certain “national champion” policies that tilt the playing field in the direction of nationally supported foreign competitors.&nbsp; Accordingly, having ready access to global pools of capital puts large U.S. firms in the best position to compete head-to-head against their foreign competitors.<h3>Conclusion</h3>Maintaining the competitive position of U.S. firms internationally is critical to ensuring the success and vibrancy of the U.S. economy.&nbsp; Forum members support the international competitiveness of U.S. firms by lending and providing a range of other financial services that large firms operating overseas require.&nbsp; Forum members are themselves global firms that are uniquely positioned to provide the services, insight and perspective that comes from their day-to-day experience in markets all over the globe.&nbsp; Working together, Forum members and large U.S. companies bring the competitive spirit and productivity of the U.S. economy to the world stage.&nbsp;&nbsp;&nbsp;

Large Bank Support for the International Competitiveness of U.S. Companies 

<h3>Introduction</h3>The recent and horrifying developments in Ukraine have created significant challenges in the oil and gas industry that have impacted consumers at the gas pump and the broader macroeconomy.&nbsp; At the same time, the U.S. economy is also on a transition path that will, over time, make increasing use of renewable energy resources.&nbsp; Large banks play a pivotal role in supporting the existing energy infrastructure and managing the transition to a less carbon-intensive energy industry.&nbsp; In this post we lay out some basic facts about large bank financing of the energy industry.&nbsp; The data clearly show that large banks have been consistently providing financing to this important industry, along with financing for the next energy boom.<h3>Bank Funding of the Energy Sector</h3>Energy companies routinely obtain significant amounts of credit from large U.S. banks.&nbsp; We can open a window into the amount of financing provided to energy companies by looking at the Shared National Credit Report.&nbsp; The Shared National Credit, or “SNC,” report provides an annual review of large loans that are shared, or “syndicated,” by three or more lenders.&nbsp; These are precisely the kinds of large and widely held bank loans that are used to fund large, capital-intensive industries such as the energy industry.The 2021 SNC <a href="https://www.occ.treas.gov/publications-and-resources/publications/shared-national-credit-report/files/shared-national-credit-report-2021.html">report</a> is particularly instructive as it contains an analysis of the loan commitments provided to a range of COVID-impacted industries.&nbsp; The chart below shows the level of SNC loan commitments made to the oil and gas industry as well as other industries from 2019 through 2021.&nbsp;<figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-09-09-at-10.16.05-am.png"><figcaption>Source: 2021 SNC Report</figcaption></figure>&nbsp;As shown in the figure from 2019 through 2021, SNC lenders were providing between $350 billion -$400 billion in loan commitments to the oil and gas sector (O&amp;G).&nbsp; It is further worth noting that among COVID-impacted industries analyzed in the report, the energy sector has received the greatest amount of bank funding.&nbsp; Of course, this is partly to be expected because the energy industry is a capital-intensive industry that typically requires more financing than less capital-intensive industries, such as the retail or entertainment sectors.&nbsp; Finally, it should be noted that large U.S. banks are generally the largest holders of SNC commitments.&nbsp; As detailed in the report, U.S. banks hold over 44 percent of all SNC commitments while foreign banks and non-banks account for 33 percent and 23 percent of all SNC commitments, respectively.<h3>The Energy Industry and Market Funding</h3>While large U.S. banks provide a significant amount of direct lending to the energy industry, direct bank lending is only one part of the credit story.&nbsp; Beyond direct financing, large banks underwrite significant amounts of security issuance, which allow large companies to obtain credit directly from public capital markets.At the onset of the pandemic in 2020, after an initial freezing of credit markets, the Federal Reserve took a number of actions to increase the flow of credit to the economy, including through the increased issuance of debt securities by large companies.&nbsp; In 2020 and 2021, large companies across an array of industries raised significant amounts of funding from capital markets as total U.S. corporate bond issuance rose nearly 65 percent relative to 2019. And this trend towards greater capital markets issuance was not lost on the energy sector.&nbsp; In the table below we highlight the debt issuance of five large, established U.S. companies in the energy sector.<figure class="table" style="text-align:center;"><table style="border-bottom:none;border-left:none;border-right:none;border-top:none;"><tbody><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:1pt solid windowtext;padding:0in 5.4pt;vertical-align:top;width:188.75pt;" colspan="2">2020 Debt Issuance of Select Oil and Gas Companies</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:125.75pt;">Oil and Gas Company</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:63pt;">Issuance ($BN)</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:125.75pt;">Chevron</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:63pt;">12</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:125.75pt;">Exxon Mobil</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:63pt;">23</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:125.75pt;">Marathon Oil</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:63pt;">3</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:125.75pt;">Phillips 66</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:63pt;">2</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:125.75pt;">Valero</td><td style="border-bottom:1pt solid windowtext;border-left:none;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:63pt;">1</td></tr><tr><td style="border-bottom:1pt solid windowtext;border-left:1pt solid windowtext;border-right:1pt solid windowtext;border-top:none;padding:0in 5.4pt;vertical-align:top;width:188.75pt;" colspan="2">Source: SEC 10k</td></tr></tbody></table></figure>As shown in the above table, energy companies clearly have availed themselves of the opportunity to raise debt financing in the U.S. capital markets.&nbsp; And these markets are primarily intermediated by large U.S. banks.&nbsp; Indeed, Financial Services Forum members underwrite nearly three-fourths of all equity and debt issuance in the U.S. Accordingly, large banks have supported the energy industry by directly financing their investment needs and by facilitating their debt raising from the public through the U.S. capital markets.<h3>Financing the Transition to a Less Carbon-Intensive Economy</h3>Much of the financing of energy companies has been used to increase our nation’s capacity for traditional, carbon-based energy, such as oil and gas.&nbsp; Yet many of these traditional energy companies, and other companies as well, are actively pursuing opportunities for the more renewable, less carbon-intensive energy sources that will power our economy in the future.&nbsp; Forum members are committed to an “all of the above strategy” that finances our nation’s transition to a cleaner and more renewable energy future while also working to ensure that today’s energy’s needs can be met effectively and efficiently.&nbsp; Forum members regularly disclose and report on their varied and distinct investments in renewable energy projects in relevant reports.&nbsp; These investments represent high-value opportunities that are designed to spur innovation to support our economy’s longer-term needs for cleaner sources of energy.&nbsp;&nbsp;<h3>Conclusion</h3>The recent and unsettling events in Ukraine have shined a light on the need to balance our efforts to support our existing energy needs while supporting innovation towards a less carbon-intensive future. As we have demonstrated, large banks provide significant amounts of financing to the energy industry to meet today’s needs through direct lending and also through underwriting securities issuance in our capital markets, while also financing the energy needs of tomorrow.&nbsp; Both activities, coupled with a sensible and supportive regulatory framework, will continue to support this vital industry as the economy confronts the long-run transition to the less carbon-intensive economy of tomorrow.

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


Climate Finance

Energy and Large Banks in Our Modern Economy

<h3>Introduction</h3>Financial Services Forum members are among the most highly capitalized and liquid banks in the United States.&nbsp; Forum members’ strong capital and liquidity position has allowed them to support the U.S. economy while also demonstrating leadership in resiliency. In this blog, we provide an update on the robust capital and liquidity levels of Forum members and discuss the implications of current capital levels for current and future economic growth.<h3>Forum Members Are Robustly Capitalized</h3>Forum members are subject to rigorous capital requirements that are more stringent than those that apply to other banking organizations, including their international peers.&nbsp; Specifically, Forum members are subject to an additional capital requirement that applies only to a Global Systemically Important Bank (GSIB): the GSIB capital surcharge.&nbsp; Moreover, the GSIB requirement levied in the United States is far more stringent than the requirement that applies internationally.&nbsp; Figure 1 below demonstrates the significant capital adequacy of Forum members by plotting the total amount of losses that are assumed to occur under the Federal Reserve’s stress test and the amount of Tier 1 capital maintained by Forum members to absorb losses in each year since 2012.&nbsp;<h4 style="text-align:center;">Figure 1: Forum Member Stress Test Losses to Tier 1 Capital</h4><figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-09-06-at-9.06.35-am.png"><figcaption>Source: Federal Reserve</figcaption></figure>As the figure clearly demonstrates, Forum members maintain a level of capital that is many multiples in excess of the amount required to absorb the Federal Reserve’s hypothetical stress losses.&nbsp; This finding is itself all the more compelling in light of the extreme nature of the Federal Reserve stress tests, which routinely envision a period of financial stress more extreme than that experienced during the financial crisis.&nbsp; Finally, just considering the 2022 exercise, total credit, market and counterparty losses for the entire banking industry, before the recognition of revenue, were estimated by the Federal Reserve to be roughly $600 billion, which is still dwarfed by the Forum’s Tier 1 capital, which stood at over $980 billion.&nbsp;&nbsp;Finally, it is important to understand Forum member capital in the context of the stringent requirements to which they are held.&nbsp; Not only do Forum members maintain capital in line with the most stringent standards, they regularly exceed these standards.&nbsp; More specifically, Forum members currently maintain common equity capital that is roughly $88 billion above all required amounts.&nbsp; Forum members maintain excess capital above requirements to ensure that unexpected market movements don’t meaningfully compromise their already strong capital position.&nbsp; Accordingly, Forum member capital and resilience stands well above the stringent standards to which they are held. &nbsp;&nbsp;&nbsp;<h3>Forum Members Maintain Ample Liquidity</h3>Beyond a strong capital position, Forum members maintain ample amounts of liquidity, which support financial stability by ensuring that a large bank can deal with substantial cash needs without disrupting its ability to extend credit to the economy.&nbsp;Recently, the Federal Reserve Board’s Financial Stability Report called attention to the significant level of liquid resources held by Forum members.&nbsp; Figure 2 below reproduces the Figure from the report.<h4 style="text-align:center;">Figure 2: Liquid Assets Held by Banks</h4><figure class="image"><img src="https://fsforum.com/a/media/screen-shot-2022-09-06-at-9.01.27-am.png"><figcaption>Source: Federal Reserve</figcaption></figure>As shown in the Figure, Forum members (“G-SIBs”) maintain liquid assets far in excess of other banking institutions and have maintained considerably more liquidity relative to their peers for well over a decade.&nbsp; The industry-leading liquidity levels at Forum members are not accidents, but represent Forum members’ strong liquidity risk management as well as more stringent liquidity requirements that are not applied to other banks.&nbsp; The fact that the liquidity levels of large banks, and Forum members in particular, are profiled in the Federal Reserve’s Financial Stability Report speaks directly to their importance as sources of stability to the financial sector and our economy.&nbsp;<h3>Resilience vs. Growth: Getting the Balance Right&nbsp;&nbsp;</h3>The data clearly demonstrate that Forum members maintain a clear leadership position in supporting the economy with robust capital and liquidity levels that not only meet but exceed the most stringent standards.&nbsp; Against this backdrop, it is worth considering whether current capital and liquidity levels are lacking.&nbsp; As shown during the pandemic, Forum members maintained sufficient capital and liquidity to support the economy and help absorb the shock created by the unprecedented public health crisis. But this is not a case of more is better.&nbsp; That is because capital and liquidity come at a real cost to the economy.&nbsp; As a specific example, a dollar of assets held as cash to satisfy a liquidity requirement simply can’t be deployed to make a loan to a small business.&nbsp; A rainy-day fund of liquid assets is one thing, but hoarding liquidity to the detriment of the economy is quite another.On the capital front, mainstream economists agree that increasing capital requirements reduces economic growth.&nbsp; As an example, a <a href="https://www.piie.com/sites/default/files/publications/wp/wp15-8.pdf">research paper</a> from the Peterson Institute for International Economics estimates that raising capital requirements by two percentage points would result in a cost to the U.S. economy of roughly $1 trillion.&nbsp; Importantly, this cost arises from increasing the cost of bank lending to businesses, households, and communities.&nbsp; The high level of Forum member capital and liquidity is a testament to GSIBs’ resiliency and their ability to support the economy in difficult times.&nbsp; At the same time, policy makers and the public should be thoughtful about the impact that further increases could have on reducing opportunity and growth in our economy.&nbsp; Quite to the contrary, available data provide no evidence to support the view that resilience is lacking.<h3>Conclusion</h3>Financial Services Forum members are among the most highly capitalized and liquid banks in the United States.&nbsp; Collectively, Forum members maintain $88 billion in capital that is above and beyond all requirements.&nbsp; The strong capital and liquidity positions of Forum members continue to support the U.S. economy while demonstrating leadership in resiliency.&nbsp; At the same time, increasing the amount of required capital and liquidity has significant downside risks in terms of stunted economic growth.&nbsp; Academic studies show that even a modest increase in capital could cost the U.S. economy as much as $1 trillion.&nbsp; Going forward, the public and policymakers should be deliberate and thoughtful about striking an appropriate balance between resilience and growth.

Standing Apart from The Crowd: GSIB Capital, Liquidity and the Economy

<h3>Introduction</h3>Since the onset of the pandemic, the U.S. government has increased the level of outstanding Treasury debt by roughly one-third, or $7 trillion.&nbsp; This rapid and significant increase in the supply of Treasury debt demands a commensurately more robust and well-functioning secondary market for U.S. Treasury securities to ensure that the U.S. government can manage the increased cost of financing the pandemic response.&nbsp; Large bank securities dealers play an essential role in the Treasury market by holding Treasury securities and providing much needed liquidity in the secondary market.&nbsp; At the same time, however, a risk-insensitive capital requirement – the supplementary leverage ratio (SLR) – has increasingly limited the ability of these banks to perform this role.&nbsp; In this post, we review some of the facts regarding the U.S. Treasury market, its interaction with the supplementary leverage ratio, and broader implications of a binding SLR for markets and the economy.<h3>U.S. Treasury Markets and Bank Capital: Then and Now&nbsp; &nbsp;&nbsp;&nbsp;</h3>The chart below shows for the first quarter of 2020 and the second quarter of 2022, 1) the amount of outstanding U.S. Treasury securities, 2) the difference between aggregate risk-based capital requirements and the risk-blind capital requirements of the SLR for the eight Financial Services Forum members, and 3) the number of Forum members for which the SLR is the binding capital constraint.&nbsp; Under U.S. bank capital rules, risk-based capital requirements serve as a primary tool to ensure that institutions are adequately capitalized for the relative risk of assets held.&nbsp; Leverage capital – which is calculated the same way regardless of the riskiness of assets – is intended to serve as a backstop.&nbsp; Whenever a Forum member has an SLR capital requirement that exceeds its risk-based requirement, the SLR is no longer a backstop, but the binding capital constraint on the bank’s lending, underwriting, and market making activities.<figure class="image"><img src="https://fsforum.com/a/media/fixed-treasury-chart.png"></figure>As shown in the first set of bars, the amount of outstanding U.S. Treasury debt has increased substantially over the past few years, in large part to fund the government’s extensive response to the pandemic.&nbsp; At the same time, there has been increasing evidence that the functioning of U.S. Treasury markets has been worsening.&nbsp; Recent <a href="https://www.wsj.com/articles/barclays-warns-of-rising-trouble-in-treasury-market-11658257246">reports</a> point to increasing volatility and rising transaction costs in the U.S. Treasury market.&nbsp; Such reports of a deterioration in Treasury market functioning have become increasingly common since the onset of the pandemic and were raised by several former regulators as a cause for concern during the <a href="https://vimeo.com/financialservicesforum">Forum’s summit</a> on July 18.&nbsp;A robust market for U.S. Treasury securities is of paramount importance to ensure that the U.S. government can continue to attract capital at reasonable cost to the U.S. taxpayer.&nbsp; In addition, some macro trends in the economy suggest that U.S. Treasury markets are likely to face more and not fewer headwinds in the future.&nbsp; More specifically, the Federal Reserve has already announced that it will be reducing its own holdings of U.S. Treasury securities, thereby increasing the need for secondary market intermediation to absorb the increase in market supply.&nbsp; In addition, foreign investors appear, at least presently, to be less willing to hold U.S. Treasuries.&nbsp; According to <a href="https://www.federalreserve.gov/releases/z1/release-dates.htm">data</a> from the Federal Reserve from the first quarter of 2020, 33 percent of U.S. Treasuries were held outside the U.S.&nbsp; As of the first quarter of 2022, only 30 percent of U.S. Treasuries were held internationally.&nbsp; With more sellers and fewer buyers, the demands on market makers in the Treasury market will be heightened for the foreseeable future.&nbsp;<h3>Bank Capital and Treasury Markets</h3>Forum members and other large banks comprise the vast bulk of market making capacity in the U.S. Treasury market.&nbsp; Accordingly, capital constraints that disincentivize market making for large banks have a direct impact on the functioning of the entire U.S. Treasury market.As shown in the figure, back in 2020, risk-based capital requirements for Forum members were, in the aggregate, $48 billion higher than capital requirements as prescribed by the SLR.&nbsp; Under risk-based capital rules, U.S. Treasury securities held in the banking book have a zero-risk weight meaning that no additional capital is required to support the holding of a Treasury security.&nbsp; Treasury securities that are held explicitly for trading are subject to more complex trading book capital rules, but the resulting risk weight is relatively low owing to the fact that Treasury securities have no default risk and generally low price volatility.&nbsp; Under the SLR, however, a $100 Treasury security must be supported by $5 in capital.&nbsp; When SLR-based capital requirements are higher than the risk-based requirements, the SLR requirements become the “binding constraint” and banks must effectively maintain $5 in capital for every $100 in Treasury securities.&nbsp; Accordingly, a situation in which risk-based requirements are comfortably higher than SLR requirements is more conducive to supporting secondary market trading of Treasury securities.&nbsp; Finally, it should be noted that while aggregate risk-based requirements were higher than SLR requirements in 2020, it was still the case that four of the Forum’s eight members had SLR requirements that were higher than their risk-based requirements, thereby putting some pressure on their dealing activities.Fast forward to 2022 and the situation is demonstrably worse for the Treasury market.&nbsp; As of the second quarter of 2022, Forum members, in aggregate, have SLR capital requirements that are $6 billion higher than their risk-based requirements.&nbsp; Now, six of the Forum’s eight members are bound by SLR requirements rather than risk-based requirements.&nbsp; As a result, at a time during which the need is acute for more robust and better functioning Treasury markets, risk-insensitive capital requirements have worsened the challenges faced by dealers seeking to provide liquidity and continuity in this critical financial market.<h3>An Old Problem with a Straightforward Solution</h3>The concerns around the binding nature of the SLR are not new.&nbsp; Back in 2020, the Federal Reserve temporarily modified the SLR for the expressed purpose of “<a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200401a.htm">easing strains in the Treasury market</a>.”&nbsp; Later, when the Federal Reserve let the temporary changes to the SLR lapse in March 2021, it committed that it would “<a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210319a.htm">soon be inviting public comment on several potential SLR modifications</a>.”&nbsp; In the 15 months that have passed, no proposals have been released, the SLR has continued to become more binding, and underlying conditions in the Treasury market have deteriorated.Deteriorating Treasury markets and increasingly binding SLR requirements have not gone unnoticed.&nbsp; Recently, the Group of 30 – a group of global policymakers, including the President of the Federal Reserve Bank of New York and the Secretary of the Treasury (as an advisory member) – issued a <a href="https://group30.org/images/uploads/publications/G30_Treasury-Mkts-UPDATE_Final_Report.pdf">status update</a> on the U.S. Treasury market.&nbsp; The report squarely addresses the SLR and finds that:[A]s Treasury debt continues to grow rapidly and market-making capacity remains limited and concentrated, the Treasury market almost surely remains highly susceptible to dysfunction under stress, and potential sources of stress are forbidding.while also noting that,“[t]he liquidity of the Treasury market under stress is reliant on a small number of very large broker-dealer affiliates of U.S. global systemically important banks (U.S. GSIBs).&nbsp; In large measure because of the massive expansion in recent years of the Federal Reserve’s balance sheet (and the accompanying expansion of central bank balances on bank balance sheets), risk-insensitive leverage ratios (notably, the Supplemental Leverage Ratio [SLR]) have become the binding regulatory constraint on the allocation of capital for most of the banks whose dealer subsidiaries are the largest providers of liquidity to the Treasury markets.”&nbsp;&nbsp;&nbsp; &nbsp;In addition, the report makes a clear recommendation about how to alleviate the problem created by the SLR.&nbsp; Specifically, the report recommends that “banking regulators should adjust leverage and risk-based capital requirements to ensure that leverage requirements are backstops to risk-based requirements rather than binding constraints on bank behavior.”<h3>Shell Games and Broader Implications of Capital Reform</h3>The need to recalibrate the SLR is widely recognized and long overdue.&nbsp; Moreover, while there has been appropriate focus on Treasury markets, we should not lose sight of the basic fact that risk-insensitive capital requirements are problematic for assets and markets well beyond the Treasury market.&nbsp; The holding and intermediation of any asset is negatively impacted by capital requirements that do not account for risk – corporate lending, the intermediation of municipal debt, and a host of other activities are inappropriately disincentivized by risk-insensitive capital requirements.&nbsp; In a complex world, painting every activity with the same brush, by its nature, cannot lead to an efficient or effective outcome.Finally, some have suggested that that one way of “solving” the problem with the SLR would be to arbitrarily raise risk-based requirements to offset any reduction in capital that might occur in recalibrating the SLR.&nbsp; Any such reverse engineering of risk-based requirements would be misguided and would represent a classic case of the “cure being worse than the disease.”&nbsp; Risk-based capital requirements should be just that – based on underlying risk and fundamentals.&nbsp; Currently, regulators are in the process of reforming the existing risk-based framework as part of the Basel III Finalization process.&nbsp; Accordingly, regulators have every opportunity to assess the adequacy and effectiveness of risk-based requirements.&nbsp; Simply re-labeling leverage capital as risk-based capital for the narrow purpose of maintaining an arbitrary level of capital in the banking system would undercut the entire purpose of the risk-based system and result in raising the cost of all credit products while easing the cost of financing the U.S. government.&nbsp;<h3>Conclusion</h3>A smooth running and robust market for U.S. Treasury securities is important for the U.S. government, the U.S. economy, and the world economy.&nbsp; The SLR is now binding on large banks and the U.S. Treasury market is being adversely impacted at a time when it can least afford it.&nbsp; Over 15 months ago, the Federal Reserve pledged to seek public comment on ways to deal with the unnecessarily binding nature of the SLR.&nbsp; The time has come to move forward on SLR reform to ensure it plays a role as a backstop without unnecessarily restricting credit to any sector of the economy.&nbsp; SLR reform should come quickly and should not be done in a way that makes the current problem permanent in the guise of “modified” risk-based requirements.&nbsp; &nbsp;&nbsp;

Past Due Notice: Addressing Leverage Capital for Large Banks to Restore Treasury Market Functioning

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The Goldman Sachs Group, Inc.

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

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

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

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David Solomon

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

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State Street Corporation

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

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

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

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

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

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

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

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Ronald O'Hanley

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

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Bank Of America

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

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

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

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

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Brian Moynihan

Bank Of America Chairman Of The Board And Chief Executive Officer

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BNY Mellon

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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Citigroup

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

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Jane Fraser

Citigroup Chief Executive Officer

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JPMorgan Chase & Co.

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

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

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

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

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Jamie Dimon

JPMorgan Chase & Co. Chairman And Chief Executive Officer

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Morgan Stanley

Mr. Gorman is Chairman and CEO of Morgan Stanley.

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

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

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

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

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

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James Gorman

Morgan Stanley Chairman And Chief Executive Officer

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Wells Fargo & Company

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

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

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

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

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

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

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

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