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Sean Campbell

Chief Economist, Head of Policy Research

In a recent op-ed, Sheila Bair recited a litany of age-old canards about leverage requirements and leverage reform that are as untrue as they are outdated.&nbsp; Below, we address the key misrepresentations that have been made about leverage requirements, risk-blind capital requirements that compare a bank’s equity capital to a measure of its total assets without regard to their riskiness, and discuss why the economy needs leverage reform in the near term.The Facts:<ol><li>Risk-based capital requirements did not cause the financial crisis.&nbsp; The op-ed argues that an overreliance on risk-based capital requirements caused the 2008 financial crisis.&nbsp; According to this worldview, the financial crisis could have been largely averted if only regulators had relied on leverage capital rather than risk-based requirements.&nbsp; This claim does not comport with the basic fact that U.S. banks were subject to a leverage ratio for years before and during the financial crisis.&nbsp; Additionally, and importantly, economic scholars such as Former Federal Reserve Chairman Ben Bernanke who have painstakingly studied the financial crisis have <a href="https://www.brookings.edu/wp-content/uploads/2018/09/Bernanke_final-draft.pdf">shown </a>that the proximate cause was a run in the non-bank sector that was tied to the non-bank funding of mortgages.&nbsp; Importantly, Bear Stearns, Lehman Brothers, Countrywide Mortgage, Fannie Mae, Freddie Mac and the money market mutual fund industry – all non-banks – failed and took a heavy toll on the economy long before a single bank failure occurred.</li><li>Risk-based capital requirements are not “gamed” by banks.&nbsp; The op-ed asserts that a key motivation for simplistic, risk-blind capital requirements is that they are “simple and transparent” and therefore can’t be “gamed” by the banks.&nbsp; This view of risk-based capital requirements has been outmoded by the very significant capital reforms that were enacted post-2008.&nbsp; Specifically, under Basel III, large banks are subject to standardized risk-based capital requirements that assign regulator-specified risk weights to various asset types that are defined and classified by regulators.&nbsp; Further, the stress tests to which all large banks are subject are unilaterally determined by regulators without any bank input.&nbsp; Current risk-based requirements are determined by regulators and are not “gamed” by the banks.</li><li>The leverage ratio is not “neutral” to capital allocation.&nbsp; The op-ed asserts that leverage ratios are “neutral” to capital allocation.&nbsp; This statement is incorrect.&nbsp; Leverage requirements mandate that every asset be funded with the same amount of equity capital.&nbsp; Low-risk assets, such as U.S. Treasuries and bank reserves, provide correspondingly low levels of financial renumeration.&nbsp; But the total cost of funding any bank asset is determined by the amount of equity that is required to fund the asset.&nbsp; Requiring low-risk and low-yielding assets to be funded with the same amount of equity capital as higher yielding assets disincentivizes banks from putting lower yielding assets on their balance sheet.&nbsp; As long as leverage ratios assign the same marginal capital cost to assets with both low and high levels of risk, lower-risk assets will face a steep disadvantage. &nbsp;&nbsp;&nbsp; &nbsp;</li><li>A binding leverage ratio is not evidence that risk-based capital requirements are too low.&nbsp; From a fundamental risk perspective, leverage capital requirements are completely arbitrary.&nbsp; Imagine a different, completely arbitrary, requirement that determines a bank’s capital requirement in terms of the number of letters in its name stated as a percentage.&nbsp; Under this rule, ACME Bank would have a capital requirement of eight percent.&nbsp; If we found that the risk-based capital requirements for ACME Bank were lower than eight percent, would we conclude that the risk-based requirements were too low?&nbsp; Surely not.&nbsp; A capital requirement with no basis in risk cannot, by design, be used to measure the adequacy of a risk-based system.&nbsp; This statement is as true for leverage-based capital requirements as it is for “name-based” capital requirements.&nbsp; Further, large U.S. banks have tripled their capital levels since the financial crisis and have also increased their capital by roughly 20 percent since 2020.&nbsp; Any assertion that a binding leverage ratio points to insufficient risk-based capital requirements is both conceptually flawed and oblivious to the basic facts on large bank capital levels.</li><li>Lowering the cost of issuing Treasuries does not “re-direct capital away from the private sector and into public coffers.”&nbsp; This statement in the op-ed ignores the fact that the borrowing cost for U.S. Treasuries sets the “base rate” that directly impacts the cost of borrowing for every other type of credit.&nbsp; The borrowing cost for auto loans, student loans, home mortgages, business loans and every other form of credit is directly tied to the “risk-free rate” that is required on U.S. Treasuries.&nbsp; Accordingly, improving the market for U.S. Treasuries is a two-fer: it reduces the cost of the U.S. taxpayers’ debt burden and it helps reduce the cost of borrowing for every other form of credit used by businesses and households.&nbsp;&nbsp;</li></ol>Leverage-based capital requirements are fundamentally flawed in a way that disadvantages low-risk assets, distorts capital allocation, and impedes the efficient flow of credit in the U.S. economy.&nbsp; In addition, the U.S. economy and financial system have significantly evolved since the 2008 financial crisis, rendering leverage capital requirements increasingly outdated.&nbsp; Outmoded and arbitrary leverage capital regulations have been backfiring on the U.S. economy for years and are in serious need of reform.&nbsp; Recent commitments by regulators and other officials to reform leverage requirements is a welcome development that we should all embrace to improve our banking system and the economy.&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp; &nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;

BankNotes Blog

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

Capital, other topics

Correcting the Record on Leverage Reform: Leverage Requirements are Already Backfiring

<h3>Introduction</h3>Nearly four years ago, the Federal Reserve <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210319a.htm">committed</a> to reconsider the supplementary leverage ratio (SLR) in light of the massive, COVID-driven expansion of the Federal Reserve’s balance sheet.&nbsp; Today, the Federal Reserve’s balance sheet still stands at nearly double its pre-expansion level, but no action has been taken to reform the SLR.&nbsp; Accordingly, there is an urgent need to reconsider the SLR in short order.&nbsp; The current level of the Federal Reserve’s balance sheet, coupled with the existing SLR regulation, results in an unnecessarily binding, risk-blind, capital constraint that is having significant deleterious impacts on financial markets and the economy. &nbsp;In the remainder of this post, we discuss the problems created by risk-blind leverage requirements that have been identified through rigorous academic research.<h3>The Backdrop</h3>The SLR was introduced as a capital requirement for large banks in 2018.&nbsp; The SLR is a risk-blind capital requirement that mandates all large banks to maintain five percent capital against all bank assets irrespective of their risk.&nbsp; Importantly, low-yielding and default-free U.S. Treasury securities and bank reserves issued by the Federal Reserve, the most liquid and risk-free asset in the world economy, must be backed by five percent capital.&nbsp; At the same time, higher-yielding assets such as corporate loans or corporate bonds also require five percent capital under the SLR.&nbsp; In a world in which all assets have the same capital cost, there is a clear and unavoidable incentive to hold higher-yielding assets (corporate loans) than lower-yielding ones (U.S. Treasuries).Back in 2018, the size of the Federal Reserve’s balance sheet was roughly $4 trillion.&nbsp; Today, the Federal Reserve’s balance sheet stands at $6.8 trillion.&nbsp; The additional $2.8 trillion in Federal Reserve assets are largely financed by issuing bank reserves.&nbsp; In the aggregate, banks must hold all of the bank reserves issued by the Federal Reserve.&nbsp; Accordingly, when the Federal Reserve increases its balance sheet it necessarily increases the amount of risk-free assets held by banks and these assets are subject to the 5 percent capital requirement of the SLR.Now that the Federal Reserve is so much larger, more banks are adversely impacted by the SLR because they are required to maintain additional capital on all the additional, risk-free, bank reserves.&nbsp; As the amount of capital required by the SLR has risen, the incentives to pull back on low-risk assets such as U.S. Treasury securities have concomitantly increased.Finally, it is important to fully appreciate how the financial system has changed since 2018.&nbsp; Table 1 below, depicts: 1) the level of the Federal Reserve’s balance sheet, 2) the amount of U.S. Treasury debt outstanding, and 3) the annual interest cost of government debt.<figure class="image"><img src="https://fsforum.com/a/media/3.10.25.png"></figure>As shown in Table 1, while the Federal Reserve has expanded its balance sheet, we have seen a nearly identical expansion in debt issued by the federal government as both have increased by roughly 65 percent.&nbsp; Moreover, the amount of money the government is spending to service its debt has grown by much more, 83 percent, owing to both an increase in outstanding debt and the general increase in interest rates that has occurred recently.&nbsp;Indeed, for the first time since records have been kept, the federal government is now spending more on interest payments than on national defense.&nbsp; What’s more, current projections of federal spending suggest that this gap will only widen in the future and that the nation’s interest bill will only become more pressing.&nbsp; As Table 1 makes clear, the financial system in 2025 looks completely different from the one we knew in 2018 when the SLR was introduced.With this backdrop in mind, it is essential that the U.S. government – including the Federal Reserve – do everything in its power to manage the federal debt, contribute to a well-functioning U.S. Treasury market, and minimize the cost of servicing our national debt.&nbsp; Unfortunately, the current stance of the SLR is antithetical to all these goals.&nbsp;&nbsp;&nbsp;<h3>What Does Research Say About Risk-Blind Leverage Requirements and the U.S. Treasury Market?</h3>We have asserted that leverage requirements are impairing the market for U.S. Treasuries and artificially increasing the cost of government debt.&nbsp; What exactly is the basis for these claims?&nbsp; The best way to assess these claims is to simply look at data-based economic research that has studied the impact of the SLR on U.S. Treasuries and financial markets.&nbsp; Luckily, this is a broad and active area of research.&nbsp; Below, we highlight three relatively recent contributions:<ul><li>A 2024 research <a href="https://www.bostonfed.org/publications/research-department-working-paper/2024/the-effect-of-primary-dealer-constraints-on-intermediation-in-the-treasury-market.aspx">paper</a> by economists at the Federal Reserve Bank of Boston found that the SLR had significant negative impacts on the ability of large dealer banks to intermediate the U.S. Treasury market.&nbsp; Specifically, they found that in response to a more restrictive SLR, dealers reduced their Treasury holdings, leading to a reduction in trading, an increase in the cost of buying and selling U.S. Treasuries, and a weaker response to Treasury auctions.&nbsp;</li><li>A 2022 research <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4175429">paper</a> by economists at the Federal Reserve Board found that banks respond to balance sheet shocks by reducing their exposure to U.S. Treasuries, particularly through reductions in repo activity. Importantly, the paper distinguishes the SLR’s impact from other regulatory requirements, such as risk-based capital and liquidity coverage ratio requirements, finding that the SLR uniquely constrains a bank’s ability to intermediate the Treasury market. &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</li><li>A 2023 research <a href="https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1070.pdf?sc_lang=en">paper</a> by economists at the Federal Reserve Bank of New York and others found that when U.S. Treasury dealers face capacity constraints, such as occurs from an increasingly binding SLR, the liquidity of the U.S. Treasury market worsens.&nbsp; In particular, as regulatory constraints become more binding, Treasury markets become more volatile and trading in the U.S. Treasury market becomes more costly.&nbsp;&nbsp;&nbsp;</li></ul>The research above makes clear that the SLR is imposing well-documented and significant costs on U.S. Treasury markets and the broader economy.&nbsp; Indeed, the U.S. Treasury market underpins essentially every other financial asset in the world.&nbsp; Accordingly, problems in the U.S. Treasury market necessarily migrate broadly throughout the rest of the financial system.&nbsp; In particular, any increase in U.S. Treasury yields or other strains will immediately spill over into the market for home mortgages, auto loans, business loans and essentially any other financial product used by households and businesses.&nbsp; For all these reasons, the Federal Reserve should take immediate action to reconsider risk-blind leverage requirements to address clearly documented problems in the U.S. Treasury market.Each of the papers above is notable because they are authored by staff of the Federal Reserve system.&nbsp; One might reasonably wonder why so much of this research emanates from within the system.&nbsp; The answer lies in the fact that each of the research papers uses confidential bank data that only the Federal Reserve can access.&nbsp; There is indeed a deep irony that only the Federal Reserve system is truly able to fully assess the implications of leverage constraints on Treasury markets, yet the Federal Reserve has so far failed to act on the findings of its own researchers.<h3>But Wait…There’s More</h3>Much of the research literature and discussion of leverage requirements revolves around the SLR.&nbsp; Lurking in the shadows lies yet another, often hidden, leverage requirement - the Tier 1 leverage requirement.&nbsp; The Tier 1 leverage requirement (T1L) is the precursor to the SLR; it was in effect for decades before the SLR was introduced and is still in effect today.&nbsp; The T1L requirement is essentially the classic, historical leverage ratio that has been used for over 100 years and was arguably a relevant capital metric 100 years ago – capital divided by total assets.&nbsp; The SLR is “supplementary” in the sense that the SLR includes certain off-balance sheet exposures like derivatives and loan commitments that are not recorded in total assets due to technical accounting rules.&nbsp;One might reasonably ask why the T1L requirement was not “de-commissioned” following the introduction of the SLR.&nbsp; The basic answer simply amounts to the fact that bureaucracies are good at creating new rules and bad at eliminating old, outmoded, and unnecessary rules.&nbsp; Dealing with the SLR without dealing with T1L would be a mistake.&nbsp; Modifying the SLR without dealing with T1L would simply amount to replacing the SLR with T1L as the new risk-blind leverage requirement and we would be back to square one all over again.&nbsp; Accordingly, it is important that T1L be addressed alongside the SLR.<h3>Conclusion</h3>Sample evidence and research, often conducted by Federal Reserve system staff, clearly show that risk-blind leverage requirements have been impairing the market for U.S. Treasuries for some time.&nbsp; The problems in the U.S. Treasury market are all the more pressing due to the steep rise in government interest payments and forecasts for an increase in the amount of government borrowing.&nbsp; The Federal Reserve, and other regulators and policymakers, should act swiftly to address the deleterious consequences of risk-blind leverage requirements on the economy.

Promises Made, Promises Kept? The Urgency of Leverage Ratio Reform

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Emma Tong

Research Associate, Policy Research

Companies across the country rely on banks to provide credit that supports their investment, success, and ultimately the growth of our economy.&nbsp; Whether it be a midwestern manufacturer investing in new equipment, a hospital adding a new operating facility to improve care, or an accounting firm purchasing a new building to support its growing employee base, companies of all stripes rely on bank lending to finance the investments that they need to support their growth as well as the customers and communities that they serve.Forum members are a leading source of credit to American companies.&nbsp; Importantly, Forum members provide corporate lending to an extremely wide swath of industries.&nbsp; The breadth of Forum member lending across the corporate spectrum is important because it allows Forum members to broadly support the economy.&nbsp; As economic conditions change and some industries grow more quickly than others, Forum members can leverage their breadth to effectively and efficiently channel lending to where it is needed most.&nbsp; &nbsp; &nbsp;In the chart below, we report the aggregate amount of credit provided by Forum members to companies through their lending activities.&nbsp; To be clear, this is only one important part of the story, since Forum members also underpin America’s capital markets, where credit and other critical services such as underwriting and risk management allow companies and their employees to thrive.<figure class="image image_resized" style="width:100%;"><img src="https://fsforum.com/a/media/blog-2.27.25.jpg"><figcaption>Source: Forum member 10-k disclosures</figcaption></figure>As can be seen in the chart above, Forum members’ lending activities are broadly distributed across various industry sectors.&nbsp; Forum members are lending nearly $600 billion to the Industrials sector that would include companies such as General Electric, Caterpillar, and Lockheed Martin to name a few.&nbsp; Forum members are also lending nearly $500 billion to the Consumer &amp; Retail sector which would include companies such as Walmart, Target, and Home Depot.&nbsp; In addition, Forum members are lending nearly $400 billion to the Technology, Media, and Telecom sector which would include companies such as Google, Amazon, and Cisco.&nbsp; These examples demonstrate the broad support that Forum members provide to help grow the economy, keep America competitive and support local communities.&nbsp;The roughly $4.8 trillion in direct lending from Forum members is a critical source of funds to drive investment and economic growth.&nbsp; Companies across the industry spectrum and across our country rely upon Forum members to invest in growth, provide income and benefits, and support American prosperity.&nbsp;Forum members support a dynamic, pro-growth policy agenda to ensure that American companies, workers, and individuals reap the benefits of the critical lending provided by our country’s leading banks.&nbsp;

Forum Lending Supports U.S. Economic Growth and Competitiveness

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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    

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Kevin Fromer

President and Chief Executive Officer

Bank supervision is a longstanding practice intended to ensure we have a safe and sound banking system.&nbsp; Experienced bank supervisors can provide informed and focused feedback to banks, supporting banks’ efforts to operate successfully in a dynamic economy.&nbsp; The benefit of appropriate supervision is clear: a safely-run bank delivers for its customers and communities.&nbsp; What if, however, supervision becomes broken, unfocused, and excessive?&nbsp; Like incorrect or excessive medication, there is an increased risk of adverse side effects.&nbsp; In recent years, the signs of those effects have become increasingly clear and pervasive.&nbsp; Bank supervision has strayed from its core objectives, and banks of all sizes are experiencing those side effects.&nbsp; The results are not good, and they ironically may be reducing safety and soundness.&nbsp; Given the critical importance of the banking system to our nation’s shared prosperity and growth, we need to get back to a rigorous but sensible approach to bank supervision and we must not wait.Four broad changes must be vigorously pursued to bring supervision back to its core mission: focus on material risks, respect the boundary between supervision and regulation, provide for effective challenge, and improve efficiency in supervision.&nbsp;&nbsp;<h3>Getting Back to the Core Mission: Restore Focus on What Matters</h3>Fundamentally, the objective of supervision is to ensure that banks operate in a safe and sound manner.&nbsp; Supervisors review the activities of banks and assess whether the firms are complying with laws, a raft of regulation and other guidance.&nbsp; They also assess whether firms are properly managing risks associated with proper funding (e.g., capital and liquidity), operations (e.g., cyber resilience), and financial crime (e.g., money laundering) to name a few.&nbsp; Outsized risks, if poorly managed, can imperil a bank’s safety and soundness.&nbsp; To be effective, bank regulators must focus their resources on those bank practices that have a clear and material bearing on a bank’s financial risks and soundness.The recent failure of Silicon Valley Bank (SVB), and the resulting reports that detail the failures leading up to its collapse, clearly demonstrates the costs of losing supervisory focus.&nbsp; The Federal Reserve’s <a href="https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf">report</a> on SVB details 31 distinct issues that were flagged by supervisors for remediation prior to its failure.&nbsp; Of those 31 issues, a significant majority – 20 out of 31 – fell under the rubric of “Governance and Controls”.&nbsp; Governance and Controls covers a range of largely process-driven issues that, while not irrelevant, do not relate to the core banking function that drives safety and soundness.&nbsp; A review of the SVB report shows that the Governance and Controls issues identified by supervisors included “data governance,” “vendor management,” and “IT asset management.”&nbsp; Unfortunately, only a relatively small share of supervisory findings related to the core capital and liquidity issues that were at the heart of SVB’s collapse.The lesson learned from SVB cannot be overstated, must not be forgotten, and must inform near-term supervisory reform efforts.&nbsp; Bank supervisors do not have limitless resources.&nbsp; The resources stewarded by bank supervisors must be focused on activities and practices that go directly to a bank’s safety and soundness.&nbsp; In his recent Congressional testimony, Chair Powell reflected on the key problem at SVB.&nbsp; In response to a direct question about SVB, he offered that “what happened was, I would say a lot of focus on process and on governance and controls and not enough focus on basic bread and butter banking, credit risk, liquidity, risk, interest rate risk, things like that.”&nbsp; Bank supervision can be significantly improved and made more efficient by heeding these words and re-focusing supervision on what truly matters.Finally, in fixing one mistake and re-focusing supervision on materiality, it is important not to make another, even more costly mistake.&nbsp; Supervisors should not engage in “Monday morning quarterbacking” of bank decisions.&nbsp; Supervisors should ask questions and seek to understand why bank management makes certain, material risk decisions, but a drive to understand should never be allowed to morph into a drive to supplant bank management.&nbsp; It can indeed be tempting for supervisors to inject their own views considering all the context and information that is being provided as part of the supervisory process, but that temptation must be actively avoided.&nbsp; Supervisors are not bankers and are not in the business of providing “consulting advice” to bankers.&nbsp; Rather, bankers and supervisors must respect the relevant expertise and role of the other party as they work together in the supervisory process.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<h3>Stick to Your Knitting: Respecting the Boundaries Between Supervision and Regulation</h3>Bank supervisors have an important job to do; they are charged with the critical task of assessing whether banks comply with existing regulations supporting bank safety and soundness.&nbsp; Bank supervisors are not charged with making new regulations or otherwise adjusting or tweaking existing regulations based on their views of bank practices.&nbsp; Regulatory staff have a different charge: they devote significant time, attention, and resources to the policy formation process. &nbsp;Their work is subject to public review and comment before implementation.&nbsp; For good reason, regulation is a distinct and separate function from the supervision function and their boundaries must be respected.&nbsp; Supervisory findings may, when subject to appropriate public transparency standards, inform the regulatory process, but supervisory judgement should not replace the existing, open, and transparent policy process. &nbsp;Private guidance or other directions by supervisors that results in a de-facto regulatory change runs counter to long-standing, good public policy and risks reducing the effectiveness of supervision.Much of supervision occurs through observation of practices across a set of banks followed by suggestion and comment.&nbsp; Such “horizontal reviews” of bank practices, when well executed, can be a useful input to the supervisory process.&nbsp; At the same time, using the findings of those reviews to require or vigorously “suggest” policy changes in bank practices provides no opportunity for public review and comment and breaches the boundary between supervision and regulation.&nbsp;<h3>Let’s Go to the Replay Center: Providing for Effective and Non-Contentious Challenge&nbsp;</h3>Professional sports have been transformed over the past 25 years by the introduction of video review.&nbsp; The use of video review reflects the fact that referees are human and make mistakes that they cannot self-identify in real-time by dint of the fact that they are… human.The same issue arises in the case of supervision.&nbsp; Often, there are differing views on complex financial and regulatory issues. For example, did he swat the basketball away before or after it reached its maximum height?&nbsp; In such cases, supervisors should be accepting of and even invite effective challenge.&nbsp; An effective challenge of an existing view requires one to rigorously re-evaluate their position and ultimately improves the quality of the viewpoint and any decision tied to it.&nbsp;Moreover, supervisors often simultaneously play the role of “judge, jury, and executioner”.&nbsp; The supervisory agency is responsible for establishing the rules, supervisors judge adherence to those rules, and the supervisory agency will mete out any penalties or other consequences for any violation of those rules.&nbsp; As a result, it is all the more important that supervisors institute and actively encourage the ability of a firm to challenge a supervisory finding.An effective challenge mechanism would allow firms to seek a third-party review of a supervisory finding or interpretation that it believes to be made in error.&nbsp; To be clear, a third party may be a representative of the supervisory agency but should not be anyone that is directly connected to the issue being challenged.&nbsp; Such reviews must be received in good faith by supervisors and must not come with the fear – real or perceived - of reprisal.&nbsp; The challenge mechanism must be predictable and efficient.&nbsp; The process to escalate and resolve a challenge must be clear to all parties, not subject to change on a whim, and should be concluded within a reasonable timeframe so that things don’t linger interminably.&nbsp;<h3>Making the Trains Run on Time: Elevating the Importance of Efficiency in Supervision</h3>Beyond focusing too much on immaterial matters, the case of SVB also demonstrated that a lack of efficiency and overly cumbersome bureaucracy in supervision can have tragic consequences.&nbsp; In the case of SVB, supervisors did identify the key lack of liquidity risk management that ultimately led to its downfall.&nbsp; Tragically, however, supervisors did not act decisively or deliberately to get ahead of the problem before it was too late.&nbsp; Rather, untold rounds of meetings and briefings were held without providing specific and actionable feedback to SVB management.&nbsp; By the time the liquidity risk crystallized, it was too late to address the long festering problem, and the firm collapsed.This incident should serve as a parable to illustrate a broader truth.&nbsp; Efficiency matters.&nbsp; Sitting on the right answer until it is too late is worse than having no answer at all.&nbsp; More broadly, supervision should be designed at the outset to be effective.&nbsp; Effectiveness means providing feedback in a reasonable time frame and then laying out clear, transparent, and actionable steps that can be taken to address the issue.&nbsp;The supervisory process must be designed to be as efficient as possible.&nbsp; As an example, supervisory communication can often be long and drawn out.&nbsp; Supervisors may conduct an exam and then take several months formulating and processing the results before any feedback is provided to firms.&nbsp; Finally, supervisory findings may not come with clear, actionable steps that can be taken to address the identified issue.&nbsp; Rather, supervisory communication may be too “high-level” or “principles-based” to be of much practical use.A move to greater efficiency in supervisory communication would promote a frank and healthy exchange of views.&nbsp; In the vein of “if you see something, say something”, a quick and direct communication shortly following identification of a supervisory issue is likely to elicit an informed and genuine response as the issue will likely still be top of mind for management.&nbsp; Shrouding each and every communication in an overly elaborate, formal and formulaic response deadens the senses and limits the scope for productive engagement.A re-invigoration of the supervisory process with a drive for greater efficiency will improve the quality and quantity of supervision and firm engagement.&nbsp; With clearer and more transparent communication, signposts, and remediation action steps, firms will realize that they have greater agency and will be incentivized to productively and collaboratively contribute to the supervisory process.&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;&nbsp;&nbsp;<h3>The Road Ahead: How Do We Get Where We Need to Go?</h3>We have laid out four key supervisory reform areas:<ol><li>Refocus supervision to focus on issues of significant materiality to safety and soundness.</li><li>Respect the boundary between supervision and regulation.</li><li>Provide for effective challenge of supervisory determinations.</li><li>Elevate the importance of efficiency in the supervisory process.</li></ol>Each of these changes is critical to reforming bank supervision.&nbsp; Together, these changes amount to a real cultural shift in supervision.&nbsp; Culture change is both notoriously difficult and spectacularly rewarding when achieved.&nbsp; Manifesting a real culture change will require an “all of the above strategy” that seeks to change both informal, internal processes and executive organization of supervision, as well as changes to the regulatory framework that governs how supervision is conducted.In some cases, new regulations are called for to enact the needed changes.&nbsp; Durable changes to a policy regime require formal changes to the “rules of the road” to establish and publicly signal a permanent shift in thinking and behavior.&nbsp; As an example, establishing an effective challenge system is one example where changes to regulations are likely required.But culture does not change by fiat alone.&nbsp; Put differently, you can’t regulate people into thinking differently.&nbsp; To affect a durable and genuine change in supervisory culture, the internal, and necessarily informal, organization and administration of supervision must change.&nbsp; The organization and number of supervisory committees, standards of practice around supervisory examination and communication, and expectations around how supervisors engage with bankers on a day-to-day basis will most efficiently and effectively be reformed by changing internal processes and procedures that reset the cultural baseline that determines “how supervision is done”.<h3>Getting Started: No Time Like the Present</h3>Effective and efficient supervision is critical to the safety and soundness of our banking system, along with the growth and American competitiveness it supports.&nbsp; Our members are committed to working with supervisors to support a safe and sound banking system that works for everyone.&nbsp; The areas of reform detailed above represent common sense changes that would bring focus and efficiency.&nbsp; They are supported by the collective experience of our members as well as the recent example of Silicon Valley Bank.&nbsp; As the collapse of SVB made clear, the conduct of supervision can have a first order impact on bank safety and soundness. Our expectation is that supervisors will immediately begin the process of implementing reforms that will have a durable and positive impact on the banking system and our economy.&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;

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

Regulatory, other topics 

The Urgency of Making Bank Supervision Focused, Efficient, and Supportive of Stability and Growth

<h3>Introduction</h3>As we navigate the start of 2025, it is a good idea to take stock of the state of large bank capital while also considering what reforms are needed to better align capital standards with economic growth.&nbsp; In this post, we document the significant inflation in large bank capital – in both dollar and percentage terms – since 2018.&nbsp; We close by outlining key capital reforms that are necessary to ensure that large banks can continue to support a robust economy while safeguarding a resilient banking system.&nbsp; Finally, the issues that we discuss below are treated in greater detail in our recent report “<a href="https://fsforum.com/a/media/financial-services-forum,-jan-2025.pdf">Observations and Recommendations for a New Administration and U.S. Economic Growth</a>”, and we refer folks to the report for a deeper dive on these issues.<h3>Large Bank Capital is at All-Time Highs</h3>Figure 1 documents the state of bank capital for Forum members.&nbsp; The chart displays a four-quarter average of Forum member aggregate common equity Tier 1 (CET1) capital – the highest quality form of capital.&nbsp; The chart shows both the dollar value of capital maintained by Forum members as well as the aggregate ratio of capital to risk-weighted assets.<figure class="image image_resized" style="width:76.98%;"><img src="https://fsforum.com/a/media/2.5.25-blog-chart.png"><figcaption>Source: Federal Reserve Y9-C</figcaption></figure>As shown in the chart, Forum members now maintain more than $950 billion in CET1 capital.&nbsp; This level of capital is an all-time high.&nbsp; The same pattern is also evident in percentage terms.&nbsp; The aggregate Forum member capital ratio now stands at over 13 percent, also an all-time high.The robust level of capital maintained by Forum members has been clearly recognized by regulators.&nbsp; As an example, the Federal Reserve recently pointed to the strong level of large bank capital among Forum members (U.S. GSIBs) in its <a href="https://www.federalreserve.gov/publications/files/financial-stability-report-20240419.pdf">Financial Stability Report</a>.&nbsp; Specifically, they noted that “CET1&nbsp;ratios for global systemically important banks (G-SIBs) reached the highest levels recorded in the past decade, while CET1 ratios for large non–G-SIBs and other bank holding companies were close to pre-pandemic levels.”&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<h3>Large Bank Capital Has Been Inflated by Ever-Rising Regulatory Requirements</h3>Considering the all-time high levels of bank capital, it is worth exploring the reason for these capital levels.&nbsp; While Forum members are committed to strong capital levels that support a resilient banking sector and robust economy, they are also subject to the requirements of bank regulators.&nbsp; And, indeed, much of the increase in required capital can be traced to inflated regulatory requirements.&nbsp; In Figure 2 below, we document the change in required capital for Forum members in just the past six years.<figure class="image image_resized" style="width:76.93%;"><img src="https://fsforum.com/a/media/2.5.25-blog-chart-2.png"><figcaption>Source: Federal Reserve Y9-C, FFIEC 101</figcaption></figure>As shown in Figure 2, CET1 requirements have increased from 8.4 percent to 11.2 percent since 2018.&nbsp; Looking further, the chart shows that the rise in requirements is driven by a significant increase in the stress capital buffer, or “SCB,” (1.9 percent to 3.5 percent) that is a result of the Federal Reserve’s stress testing framework as well as a significant increase in the GSIB surcharge (2.0 percent to 3.2 percent).&nbsp; These increases have occurred despite the fact that the risk profile of Forum members has improved.In the case of the GSIB surcharge, the increase is driven largely by an unwarranted inflation in GSIB surcharges stemming from the massive increase in the Federal Reserve’s balance sheet since 2018.&nbsp; As we have discussed <a href="https://fsforum.com/news/raising-the-cost-of-credit-at-the-wrong-time-the-unnecessary-and-counterproductive-rise-in-the-gsib-surcharge">previously</a>, both paradoxically and perversely, the GSIB surcharge for Forum members continues to increase despite the fact that the expansion of the Federal Reserve’s balance sheet increases the supply of safe bank reserves, which lowers systemic risks.In the case of the stress capital buffer, the increase stems from the replacement of a fixed “capital conservation buffer” with a buffer that increases or decreases based on the potential losses simulated in the annual stress test exercise.&nbsp; This new capital requirement was introduced in 2020.Finally, while it is not displayed in Figure 2, no discussion of large bank capital requirements is complete without mentioning risk-blind leverage capital requirements.&nbsp; As we have <a href="https://fsforum.com/news/past-due-notice-addressing-leverage-capital-for-large-banks-to-restore-treasury-market-functioning">previously</a> discussed, the massive inflation of the Federal Reserve’s balance sheet has made leverage capital requirements increasingly binding and has indirectly led to increased capital levels for large banks.&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;In sum, a primary driver of increased capital among large banks has been an inexorable and unnecessary inflation of large bank capital requirements, which are not supported by any consistent, well-established analysis.&nbsp; The only common thread tying together these developments has been the loose claim that “more is better.”&nbsp; Of course, this claim is fundamentally incorrect as it ignores the fact that increasing capital has a real economic cost.&nbsp; Like any economic resource, unchecked increases, at some point, become counterproductive.&nbsp;<h3>Capital Reform in 2025&nbsp;</h3>Forum members are strongly committed to robust capital standards that are transparent, risk-sensitive, and strike the right balance between safety and growth.&nbsp; Unfortunately, the last several years have witnessed a variety of capital-related policies that have moved us further away from an appropriate and efficient bank capital regime that supports the U.S. economy.&nbsp; The following capital policy initiatives should be undertaken in 2025 to reform and improve the large bank capital regime.<ol><li>Any implementation of Basel III Endgame must be consistent with its original intent, coherent with other capital requirements, and mindful of the robust level of capital maintained by large banks.&nbsp; Basel III Endgame was developed as a means of raising capital standards for non-U.S. banks to closely align with U.S. standards and was not intended to materially increase capital.&nbsp; As described above, U.S. large bank capital is at an all-time high and exceeds the level maintained by foreign peers.&nbsp; Any final implementation of Basel III Endgame in the United States must ensure a level playing field with those of non-U.S. jurisdictions and should not result in any increase in capital for large U.S. banks.&nbsp;&nbsp;</li><li>&nbsp;The GSIB Surcharge must be fundamentally reformed.&nbsp; The U.S. version of the GSIB surcharge is significantly more stringent than the international standard applied to foreign GSIBs.&nbsp; In addition, the U.S. version of the GSIB surcharge mechanically increases for reasons that have nothing at all to do with systemic risk and in some cases increases when systemic risk decreases.&nbsp; The U.S. GSIB Surcharge must be rationalized with the international standard and should not be allowed to increase unabated as the size of the economy or the size of the Federal Reserve’s balance sheet increases.</li><li>Leverage capital requirements must be reformed so that they are appropriate for the current size of the Federal Reserve’s balance sheet.&nbsp; It is well documented and understood that current leverage capital requirements are undermining the market for U.S. Treasuries and other low-risk assets.&nbsp; Indeed, the G30 publicly <a href="https://static1.squarespace.com/static/58d527666a4963244b157400/t/6102d10a888ff15114a6e71d/1627574539757/G30_U.S_._Treasury_Markets-_Steps_Toward_Increased_Resilience.pdf">called</a> upon the Federal Reserve to reform leverage requirements for this reason.&nbsp; Back in 2021, the Federal Reserve publicly <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210319a.htm">committed</a> to “soon” reconsider leverage capital requirements, but has not done so.&nbsp; Leverage capital requirements must be reformed so as not to serve as the binding capital constraint and to restore incentives to provide much-needed liquidity to the U.S. Treasury market.</li><li>&nbsp;The stress tests must be reformed to provide transparency and reduce volatility in the annual resetting of the SCB.&nbsp; Recently, the Federal Reserve <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20241223a.htm">announced</a> that it will undertake serious reform of the stress testing regime to improve transparency and reduce unwarranted volatility.&nbsp; We support these efforts and will engage further as they unfold in 2025.</li></ol><h3>Conclusion</h3>Capital levels among Forum members are at an all-time high.&nbsp; Forum members support robust capital standards that support a resilient banking sector and a robust economy.&nbsp; Much of the observed increase in capital over the past several years has been the result of unchecked and inflated regulatory standards that have been allowed to increase without being tethered to any analysis or serious consideration of the appropriate path forward.&nbsp; The reforms described above would improve the effectiveness and efficiency of the large bank capital regime, improve international consistency and competitiveness, and support a strong U.S. economy while maintaining a highly resilient banking system.

Large Bank Capital: There is More to Inflation Than the Price of Goods and Services

This week we learned that bank regulators may re-propose their rule to implement the Basel III Endgame in the United States.&nbsp; The potential changes were outlined in a <a href="https://www.federalreserve.gov/newsevents/speech/barr20240910a.htm">speech</a> by Federal Reserve Vice Chair for Supervision Michael Barr and were the first public explanation of the “broad and material” changes announced by him and Fed Chair Powell earlier in the year.As we await a re-proposal, it is worth considering some initial observations.First, it is important to consider the potential capital impact of 9 percent.&nbsp; In a world in which the largest U.S. banks are demonstrably very highly capitalized and strong, and in which the U.K. has announced its Basel III Endgame will result in an impact of less than 1 percent and the EU stands at 5.6 percent, we still fundamentally question why this proposal raises capital for U.S. banks, and why our policymakers would choose that outcome for the U.S. economy.&nbsp; Basel III Endgame was never intended to increase capital requirements. Given the array of strong prudential safeguards that have been enacted over the past 15 years, it is entirely unclear as to why any measurable increase in large bank capital is needed.&nbsp;Second, the process for reconsidering the proposal is an unusual one.&nbsp; We expect to see revisions that have been agreed by the Fed, the OCC, and the FDIC, but we will not see potential revisions of areas that are still being considered. Commenters will have to determine if their concerns were addressed and to what extent, or completely unaddressed.&nbsp; In addition, the re-proposal likely will be complex and lengthy.Third, the original proposal lacked critical economic analysis, including cost-benefit analysis, that is essential for the public to have and consider.&nbsp; Many decisions in the original proposal lacked justification, and for us, defied explanation.&nbsp; Hopefully, a re-proposal will address these serious shortcomings.The most meaningful changes previewed would alter the imposition of higher capital charges for certain credit exposures, equity exposures, and operational risk.&nbsp; What appears to be largely unaddressed, however, are very significant and higher charges for <a href="https://fsforum.com/a/media/basel-iii-endgame-market-making-requirement-threatens-liquidity,-economy,-and-financial-stability.pdf">exposures</a> associated with trading, market making, and underwriting.&nbsp; These activities are already subject to additional, stringent regulation post-financial crisis, including capital requirements.&nbsp; And they are no less important for the wide range of large companies, mid-market businesses, pensions, state and local governments and other institutions, like universities, which use the services of major banks to access capital, invest, grow and contribute to society. These bank customers serve people and businesses across the country, so not addressing these issues could, as experts have found, increase the costs or reduce the availability of the services they provide.In addition, the re-proposal appears to fall short of providing sensible capital requirements for lending to a wide swath of creditworthy businesses in the United States. The proposal of July 2023 provided a lower capital charge to corporates deemed to be “investment grade” if they are publicly traded (think General Motors), but would apply higher capital charges for companies that are arguably equally credit worthy but privately held (think Chick-fil-A).&nbsp; As we have pointed out, there are a relatively small number of publicly traded companies in the U.S., and many more private ones that would be subject to higher capital charges that are not justified by elevated credit risk.&nbsp; The re-proposal would carve out companies that are “regulated entities” like pensions and mutual funds, but everyone else – essentially non-financial companies – would still be subject to a higher capital treatment.&nbsp; There is no connection between whether a company is high risk or low risk and whether it issues publicly traded securities.&nbsp; If the re-proposal affirms this observation, we believe there will be significant interest in further work on this issue.We look forward to reviewing the re-proposal.&nbsp; It is important we get this right.

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

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

Basel 3 Endgame 

Basel III Endgame: Where Things Stand

<h3>Introduction</h3>In July, the Government Accountability Office (GAO) issued a <a href="https://www.gao.gov/assets/gao-24-106206.pdf">report</a> that examined the scope and quality of regulatory analysis performed by the three banking agencies (FDIC, Federal Reserve, OCC) in promulgating bank regulations.&nbsp; The report found that “the analyses regulators conducted for many of the 22 major capital and liquidity rules (issued 2012–2021) that GAO reviewed did not consistently reflect leading practices.”&nbsp; Further, the GAO also found that “they did not always identify alternative approaches or quantify benefits and costs.”&nbsp; The findings of this report are important in light of the pending Basel III Endgame proposal and deserve significant attention from the public.&nbsp; In this blog, we briefly review the report and its findings, and discuss the implications for the Basel III Endgame capital proposal.<h3>The GAO’s Key Findings and Recommendations</h3>The GAO report is highly detailed and specific, but the key findings in the report can be summarized as follows.First, the prudential agencies’ analysis did not always reflect key elements of good regulatory analysis.&nbsp; Importantly, the report states that the reviewed analyses did not always: 1) establish a baseline by indicating what would happen if the rule were not adopted, 2) consider and evaluate alternatives beyond the proposed regulation, and 3) assess the benefits and costs of a proposed regulation.&nbsp; Each of these elements is a critical aspect of good regulatory analysis that should be included in any rigorous analysis of a proposed regulation.&nbsp;&nbsp;Second, the Federal Reserve and FDIC did not consistently document the regulatory analysis that was conducted.&nbsp; In effect, the analysis that was included in the agencies’ public rulemakings were not “backed up” with any significant or detailed documentation explaining how or why certain conclusions were reached.&nbsp; In describing its finding, the GAO indicated that “the Federal Reserve’s documentation of its regulatory analysis (other than descriptions in Federal Register notices) did not consistently include information that would allow a qualified third party to understand the basic elements of its analysis.”&nbsp; This finding is particularly concerning as it casts doubt on the entire process by which regulatory analysis is conducted and decisions are reached.&nbsp; Put simply, if analysis is not sufficiently documented so that a qualified third party can understand how conclusions were reached, how can those conclusions be relied upon to support durable regulatory policy?Third, the agencies performed few retrospective reviews.&nbsp; In assessing whether a regulation is appropriate, it is critical to analyze the regulation on both a prospective and retrospective basis.&nbsp; Prospective reviews are critical, but are also, by their very nature, uncertain.&nbsp; Often, the impact of a rule will depend on future events that are difficult to forecast.&nbsp; This is where good retrospective analyses come into play.&nbsp; After a rule has been in place for a significant period of time, regulators should consider the impact of the rule as a means of cross-checking the initial prospective analysis.&nbsp; Such analyses have the potential to identify key areas for improvement that would have been difficult to identify before the regulation was put in place.As a result of these findings, the GAO made two specific recommendations to the Federal Reserve and OCC (no recommendations were made to the FDIC).<ol><li>Policies and procedures for consistently performing regulatory analyses that align with leading practices, including for documenting analyses, should be developed and implemented. (Recommendation made to the Federal Reserve)</li><li>Policies and procedures for systematically performing retrospective reviews of regulations should be developed and implemented. (Recommendation made to the Federal Reserve and OCC)</li></ol><h3>The Implications of the GAO Report for the Basel III Endgame Proposal</h3>As discussed, the GAO report did not include the Basel III Endgame proposal in its scope, but the GAO’s findings and recommendations are highly relevant to the Basel III Endgame (B3E) proposal.Importantly, as has been noted by a wide array of commenters including public interest groups such as the <a href="https://www.urban.org/research/publication/bank-capital-notice-proposed-rulemaking">Urban Institute</a>, the regulatory analysis contained in the B3E proposal is lacking in several respects, many of which were identified in the GAO report. &nbsp;A key limitation of the B3E proposal is that in many cases, the proposal simply provides no cost-benefit justification for the rule other than an unsupported assertion that the benefits outweigh the costs.&nbsp; As discussed in the GAO report, it is critical that the agencies fully explain the analysis and methods that they use to arrive at their conclusions and that the analysis provide sufficient data so that a qualified third party can ascertain how the conclusions are reached.Recently, Federal Reserve Chair Powell has discussed the possibility of a B3E re-proposal in light of the “broad and material” changes that are expected to be necessary in light of the received comments.&nbsp; In addition to re-proposing the rule, it is critical that any re-proposal of B3E be paired with an extensive cost-benefit analysis that adheres to the standards of good regulatory analysis identified in the GAO report.In order to achieve this result, it will be necessary that the GAO’s recommendations are adopted and fully implemented before any re-proposals are made to ensure that the important shortcomings identified by the GAO are fully addressed.Rigorous and transparent cost-benefit analysis is the hallmark of good, durable policymaking.&nbsp; The GAO report is important because it clearly identifies several key aspects in which banking agency regulatory analysis falls short of the mark.&nbsp; Adopting the GAO’s recommendations and fully implementing them in the context of any B3E re-proposal will help ensure that the resulting proposal is appropriate for the banking sector and the broader economy.&nbsp;&nbsp;The GAO report also identified the need to conduct regular, retrospective reviews of regulations.&nbsp; This finding is directly in line with previous statements of Federal Reserve officials that a “holistic review” of large bank capital standards would be conducted.&nbsp; Despite these statements, however, the B3E proposal was issued without first conducting a holistic, retrospective review of the existing large bank capital framework.&nbsp; The lack of a holistic review is itself highly problematic because of the large number of capital and related reforms that have been adopted since the financial crisis.&nbsp; Ultimately, it is not possible to assess the adequacy of the B3E proposal without first rigorously assessing the state of the current large bank capital framework with a holistic, retrospective review.Finally, the call for more regular retrospective reviews has wider implications well beyond B3E.&nbsp; As a specific example, the Federal Reserve has yet to perform a retrospective review of the GSIB surcharge as it indicated it would do when the rule was finalized in 2015.&nbsp; More broadly, the Federal Reserve has publicly committed itself to retrospectively <a href="https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications.htm">review</a> its monetary policy framework every five years.&nbsp; A similar, rigorous, review of the bank regulatory framework should be performed at a similar frequency.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<h3>Conclusion</h3>The recent GAO report makes important findings that should have a significant impact on the approach that banking regulators take to promulgating regulations.&nbsp; Several of the findings contained in the GAO report are directly relevant to the current B3E proposal.&nbsp; Specifically, the B3E proposal does not adequately quantify the costs and benefits of the proposal, and the proposal was not paired with a holistic, retrospective review of the large bank capital framework.&nbsp; Any future re-proposal of B3E should fully conform with the recommendations of the GAO report.&nbsp; A comprehensive cost-benefit analysis of B3E that holistically accounts for the existing large bank capital framework will result in a more grounded, appropriate and durable capital framework for large banks and the broader economy.&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;

Playing Catch Up on Cost-Benefit Analysis: Regulators Need to Up Their Game on Basel III Endgame

<h3>Introduction</h3>This Spring, Federal Reserve Vice Chair for Supervision Michael Barr gave a <a href="https://www.federalreserve.gov/newsevents/speech/barr20240520a.htm">speech</a> previewing some changes to large bank liquidity regulations that may be proposed by the banking agencies.&nbsp; In particular, the Vice Chair indicated that the “regulatory adjustments we are considering would ensure all large banks maintain better liquidity risk management practices going forward.”&nbsp; The largest banks, however, already maintain heightened liquidity risk management practices.&nbsp; In this post, we review the current requirements for Forum members (U.S. GSIBs), discuss the lack of any nexus between the regional bank turmoil of last Spring and the state of Forum members, and make some recommendations to ensure that any proposed liquidity regulations are appropriately targeted, thoughtful, and, critically, informed by data and analysis.<h3>SVB as a Pretext for Tighter U.S. GSIB Liquidity Regulation: A Shoe That Does Not Fit&nbsp;&nbsp;</h3>The events of Spring 2023 that resulted in the failures of Silicon Valley Bank (SVB) and Signature Bank and stirred turmoil among a variety of U.S. regional banking organizations have been cited on several occasions as evidence that all large banks need tighter regulations for liquidity, or the assets banks have available to quickly meet short-term obligations.&nbsp; Unfortunately, this assertion misapplies the lessons from last Spring and does not recognize the liquidity profile and regulatory framework for U.S. Global Systemically Important Banks, or GSIBs.The failure of SVB, Signature Bank and the turmoil that roiled some regional banks in 2023 had absolutely nothing to do with U.S. GSIBs.&nbsp; SVB and Signature were smaller regional banks that were not subject to the broad and extensive panoply of liquidity regulations that apply to U.S. GSIBs.&nbsp; More specifically, these regional banks, and other banks with similar size and activity profiles, were not and are not subject to:<ul><li>The most stringent form of the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)</li><li>Resolution-based liquidity requirements (RLAP, RLEN)</li><li>A supervisory liquidity oversight program through the Federal Reserve’s Large Institution Supervision Coordinating Committee (LISCC) – only U.S. GSIBs are covered by the Federal Reserve’s <a href="https://www.federalreserve.gov/supervisionreg/large-institution-supervision.htm">LISCC supervisory program</a>.</li></ul>These requirements represent much more than an inscrutable regulatory alphabet soup.&nbsp; The extreme focus on U.S. GSIB liquidity since the financial crisis has had a transformative effect on the liquidity profile of U.S. GSIBs.&nbsp; To wit: consider the following chart and commentary from the Federal Reserve’s most recent Financial Stability <a href="https://www.federalreserve.gov/publications/files/financial-stability-report-20240419.pdf">Report</a>.<figure class="image"><img src="https://fsforum.com/a/media/8.8.24-blog.png"></figure>In particular, the Federal Reserve said regarding High Quality Liquid Assets (HQLA), “U.S. GSIBs continued to hold more HQLA (liquid assets) than required by the LCR – the requirement that ensures banks hold sufficient HQLA to fund estimated cash outflows for 30 days during a hypothetical stress event.”&nbsp; As the chart, and the statement in the Financial Stability Report clearly show, U.S. GSIBs maintain ample liquidity that is well ahead of other U.S. banks.&nbsp; In the face of such clear and unambiguous data, it is difficult to fathom why regulators would think that U.S. GSIBs require even stricter liquidity requirements.&nbsp;&nbsp;&nbsp;Finally, two specific events that unfolded during last year’s regional banking turmoil clearly demonstrate the liquidity strength of Forum members.&nbsp; First, as documented in <a href="https://libertystreeteconomics.newyorkfed.org/2023/05/bank-funding-during-the-current-monetary-policy-tightening-cycle/">research</a> conducted by the Federal Reserve, Forum members actually gained deposits during this period as households and businesses sought the safety and stability provided by Forum members with their high levels of capital, liquidity and overall resilience.&nbsp; Second, amid the unfolding turmoil, Forum members were called upon to help stabilize another struggling bank, First Republic, and contributed the majority of a $30 billion <a href="https://www.bankingdive.com/news/largest-banks-deposit-30b-in-ailing-first-republic-bank-JPmorgan-SVB-Wells-Fargo-contagion/645270/">liquidity injection</a> to First Republic to provide regulators more time to resolve the failing bank.&nbsp;The strong liquidity profile of Forum members as well as the actual events of Spring 2023 clearly indicate that U.S. GSIBs do not have any liquidity problems requiring redress.&nbsp; Rather, Forum members are a source of liquidity strength and resilience that supported the banking sector and the entire economy during that challenging period.&nbsp; Accordingly, any suggestion that the events of SVB “clearly show” a need for more and tighter liquidity regulation for Forum members is plainly inconsistent with the clear and incontrovertible facts from that event.<h3>A Way Forward on Liquidity Regulation</h3>Vice Chair Barr’s speech clearly indicates that regulators are preparing to suggest some important changes to bank liquidity regulation.&nbsp; The issues that regulators are considering are quite complex and would impact the entire economy.&nbsp; Accordingly, regulators should be committed to getting it right rather than getting it done.A precondition to getting it right is clearly defining the problem to be solved with due regard for differences in the state of liquidity profiles and liquidity regulation across the banking sector.&nbsp; Accordingly, before any new liquidity regulations are proposed, banking regulators should release a data-based, comprehensive analysis of the existing liquidity regulatory framework that clearly identifies the specific problem that needs to be addressed.&nbsp; Importantly, the report should clearly account for the graduated stringency of regulation that is applied to larger and larger banks with Forum members being subject to the most stringent liquidity requirements.&nbsp; The analysis and data used to arrive at its conclusions should be available for public comment.&nbsp;Recently, the banking sector has dealt with a capital proposal that was subsequently followed by a data collection that is being used to further define and refine the policy proposal.&nbsp; This approach has raised several legitimate and difficult to cure process concerns that should be avoided in the context of any future liquidity proposals.&nbsp; These process concerns can be squarely addressed by taking a systematic, thoughtful, and data-based approach to liquidity regulation that clearly communicates the specific problem at hand before any proposals are issued.&nbsp;&nbsp;Following the release of the analysis and a review of the comments, regulators may come to the view that changes to the liquidity regime are warranted.&nbsp; If that is the case, banking regulators should begin by first issuing an Advanced Notice of Proposed Rulemaking (ANPR).&nbsp; An ANPR is often used by regulators to thoughtfully engage with the public and seek information prior to issuing a specific proposal.&nbsp; The use of an ANPR gives regulators the opportunity to gather data and information that can be helpful in calibrating a regulatory proposal.&nbsp; Such public engagement is a hallmark of a deliberate and thoughtful regulatory process that puts “Getting it Right” ahead of “Getting it Done.”<h3>The Federal Reserve Should Put Discount Window Reform Ahead of Any New Regulation</h3>Finally, it is important to consider other important lessons from the recent regional bank turmoil.&nbsp; One clear lesson from the 2023 turmoil is that the Federal Reserve’s discount window is in serious need of reform.&nbsp; The events surrounding SVB revealed that the Federal Reserve’s <a href="https://www.federalreserve.gov/monetarypolicy/discountrate.htm">discount window operations</a> – which allow financial institutions to borrow from the Federal Reserve – have not kept pace with basic advancements in information technology that have transformed our whole economy in the past thirty years.&nbsp; An antiquated and largely manual discount window cannot possibly serve a modern banking system that is defined by sophisticated and highly automated information technologies.&nbsp; The deficiencies of the discount window are so glaring that Congress has offered <a href="https://www.warner.senate.gov/public/index.cfm/pressreleases?id=37CA4518-D604-41DB-B020-C8365668E702">legislation</a> to “reform the Federal Reserve’s discount window for the 21st century economy.”&nbsp; Launching a raft of new liquidity regulations before addressing longstanding and significant problems with the discount window would be a clear case of putting the cart before the horse.&nbsp; The discount window is an integral component of the bank liquidity landscape, so ensuring that it operates efficiently and effectively should be a precondition to any new regulation.&nbsp; &nbsp;A modernized and well-functioning discount window will itself improve bank liquidity throughout the entire banking sector and complement existing bank liquidity regulation.&nbsp;&nbsp;&nbsp; &nbsp;<h3>Conclusion</h3>Increasingly regulators are asserting that the large bank liquidity framework needs repair.&nbsp; The assertion is largely based on the idiosyncratic failure of a few smaller institutions last Spring that bear no resemblance in any way, shape, or form to Forum members.&nbsp; The use of that historical episode as a pretext for more stringent GSIB liquidity regulation is wholly inconsistent with the unambiguous facts concerning the liquidity profile of U.S. GSIBs and that unfortunate event.&nbsp; If regulators are determined to launch an effort to change the existing liquidity regime, they should begin by providing the public with a data-based and comprehensive analysis that clearly identifies the specific shortcomings that need to be addressed.&nbsp; Any subsequent proposals should be preceded by an ANPR to facilitate a deliberate and thoughtful approach to regulation that will prove to be appropriately calibrated and durable. Finally, regulators would do well to turn their attention to addressing clear deficiencies with the discount window before launching a raft of new and unproven liquidity regulations.&nbsp; &nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp; &nbsp; &nbsp;&nbsp;&nbsp;

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The nation’s largest banks are subject to the most stringent liquidity standards among U.S. banks. These standards ensure that the largest U.S. banks have sufficient liquid resources, such as cash, to meet liquidity needs such as when customers withdraw money from their accounts. Since 2009, the U.S. GSIBs have tripled their liquid assets, allowing them to remain strong and continue to lend and support the economy in the face of headwinds.

Liquidity 

Getting It Right Before Getting It Done – Large Bank Liquidity Regulation

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

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The Forum supports a review of the GSIB surcharge, a capital requirement that was agreed to internationally, but that U.S. regulators have implemented in a manner that places higher requirements on U.S. banks than that required of foreign competitors. 

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


GSIB Surcharge 

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

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Citigroup

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

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Jane Fraser

Citigroup Chief Executive Officer, Forum Chair

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BNY 

Robin Vince is President and Chief Executive Officer of BNY and a member of its Board of Directors. Previously, he was Vice Chair of BNY and CEO of Global Market Infrastructure. In that role, he oversaw BNY’s Clearance and Collateral Management, Treasury Services, Markets and Execution Services and Pershing businesses. Prior to joining BNY 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 Chief Executive Officer, Forum Vice Chair

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Bank Of America

Brian Moynihan leads a team of more than 200,000 employees dedicated to making financial lives better for people, companies of every size, and institutional investors across the United States and around the world. Bank of America is recognized as a top employer by Working Mother magazine and Military Times. The company is also listed on Fortune magazine’s list of the Best Workplaces for Diversity and the Best Workplaces for Parents. It was also named one of the Best Places to Work for Disability Inclusion by the U.S. Business Leadership Network and the American Association of People with Disabilities. In 2018, Euromoney recognized Bank of America as the World’s Best Bank and the World’s Best Bank for Diversity and Inclusion, as part of their annual Global Awards for Excellence. Bank of America was also named the 2019 Catalyst Award winner, honored for supporting the continued development, empowerment and advancement of women in the company and around the world. Moynihan participates in several organizations that focus on economic and market trends, including the World Economic Forum International Business Council, the Financial Services Forum, the Bank Policy Institute (chair), the Business Roundtable, and the American Heart Association CEO Roundtable (co-chair). He is also a member of the Federal Advisory Council of the Federal Reserve Board. Moynihan leads the company’s Global Diversity and Inclusion Council and is a member of the museum council for the Smithsonian’s National Museum of African American History and Culture. Moynihan is also a member of the Brown University Corporation’s Board of Fellows and the Congressional Medal of Honor Foundation Board.

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Brian Moynihan

Bank Of America Chairman Of The Board And Chief Executive Officer

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The Goldman Sachs Group, Inc.

David Solomon is Chairman and Chief Executive Officer and a member of the Board of Directors of The Goldman Sachs Group, Inc. Previously, he was President and Chief Operating Officer and prior to that, he served as Co-Head of the Investment Banking Division from 2006 to 2016. Before that, Mr. Solomon was Global Head of the Financing Group, which includes all capital markets and derivative products for the firm’s corporate clients. He joined Goldman Sachs as a Partner in 1999. Mr. Solomon is a member of the Board of Trustees of Hamilton College and serves on the board of The Robin Hood Foundation.

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David Solomon

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

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JPMorganChase 

Jamie Dimon is Chairman of the Board and Chief Executive Officer of JPMorganChase, 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

JPMorganChase Chairman And Chief Executive Officer

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Morgan Stanley

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

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Ted Pick

Morgan Stanley Chief Executive Officer

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State Street Corporation

Ron is chairman and chief executive officer of State Street Corporation. He is also a member of State Street Corporation’s Board of Directors. Ron was previously president and chief operating officer of State Street Corporation, and before that president and chief executive officer of State Street Global Advisors, the investment management arm of State Street Corporation. He joined State Street in 2015. Prior to State Street, Ron was president of Asset Management &amp; Corporate Services for Fidelity Investments, responsible for all Fidelity asset management organizations and Fidelity’s corporate functions and enterprise technology. He served at Fidelity from 2010 to 2014. Prior to joining Fidelity, Ron served as president and chief executive officer of BNY Mellon Asset Management in Boston, a position to which he was named in 2007. During this time, he also served as vice chairman of Bank of New York Mellon Corporation and was a member of its Executive Committee. Additionally, Ron oversaw all of Bank of New York Mellon’s activities in Asia. Prior to the 2007 merger of Bank of New York and Mellon, he was vice chairman of Mellon Financial Corporation and president and chief executive officer of Mellon Asset Management. He served at Mellon and Bank of New York Mellon from 1997 to 2010. Prior to Mellon, Ron was with McKinsey &amp; Company, Inc., from 1986 to 1997 and was elected a partner in 1992. He founded the Investment Management practice worldwide and was co-founder and co-leader of the firm’s North American Personal Financial Services practice. Additionally, he was a member of the Worldwide Property &amp; Casualty Insurance practice. During his tenure with McKinsey, Ron served in the firm’s Boston, New York, and Stockholm offices. Ron received his Bachelor of Arts degree in political science from Syracuse University in 1980 and his Master of Business Administration from Harvard Business School in 1986. Ron serves on the boards of Unum Corp. and Rhode Island Commerce Corporation. He also serves on the boards of Beth Israel Lahey Health, The Boston Foundation, IYRS School of Technology and Trades, Syracuse University and WBUR. Ron’s philanthropic and civic interests include corporate governance, retirement/healthcare policy and funding, education, and climate. He has led several initiatives on gender equality. Ron is a frequent speaker and writer, and an avid offshore sailboat racer.

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Ronald O'Hanley

State Street Corporation Chairman And Chief Executive Officer

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Wells Fargo & Company

Charles W. Scharf is chief executive officer and president, and a member of the Board of Directors of Wells Fargo &amp; Company. A financial services veteran with 24 years of experience in leadership roles in the banking and payments industries, Charlie served as chief executive officer of Bank of New York Mellon from July 2017 to October 2019 and the chairman of its board from January 2018 to October 2018. He also was chief executive officer and a director of Visa Inc. from October 2012 to December 2016. During his tenure at Bank of New York Mellon, Charlie demonstrated a strong track record in initiating and leading change, driving results, strengthening operational risk and compliance, and innovating amid a rapidly evolving digital landscape. As the CEO of Visa, Charlie transformed the firm into a technology-driven digital commerce company by partnering with the world’s leading technology companies to drive new payment experiences and introduce new technologies to improve payment system security. Previously, he was a managing director of One Equity Partners at JPMorgan Chase &amp; Co. and chief executive officer of Retail Financial Services at JPMorgan Chase. He also was chief executive officer of the retail division of Bank One Corp., chief financial officer of Bank One Corp., chief financial officer of the Global Corporate and Investment Bank division of Citigroup, and chief financial officer of Salomon Smith Barney and its predecessor company. Charlie earned a Bachelor of Arts degree from Johns Hopkins University and an MBA from New York University. He is a director of Microsoft Corporation, serves on the board of trustees of Johns Hopkins University, is a member of The Business Council, and is chairman of the New York City Ballet. He lives in New York City.&nbsp;

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