Remarks via Joseph Seidel, SIFMA Chief Operating Officer, Ready for Presentation at the SIFMA Basel III Finals Roundtable, Part II
As Ken pointed out, the U. S. policymakers who proposed the final Basel III package now that they still have work to do have stated that they plan to make really extensive adjustments to the existing proposal.
For what? Because it is very clear that the proposal is going unnecessarily and that the negative consequences will be serious.
US banks’ capital levels are already extremely high by old standards and in terms of overall capital levels and quality. These levels provide an appropriate balance between monetary stability and economic growth.
The U. S. proposal, however, would further increase capital needs.
While this complex proposal will have significant effects across the economy, one of its least discussed elements may have the most profound impacts, and that’s what we’ll focus on today.
As noted by SIFMA in our comment letters sent earlier this year, the proposed capital increases in particular for the capital markets activities of banking organizations as part of the Fundamental Review of the Trading Book (FRTB) and the Credit Valuation Adjustment (CVA) are much larger than what was announced in the proposal and are not commensurate with the underlying risks.
In fact, the new quantitative industry has an effect on valuation estimates that the capital for the commercial activities of the big banks would increase by up to 129% from its current traditionally higher levels, which would have a negative impact on the ability of the big banks to provide a variety of facilities in the capital markets for their clients.
Given that U. S. capital markets provide 75 percent of the financing of the real economy, and given the important role that large banks play in intervening those markets, such dramatic capital increases threaten to undermine market liquidity and dynamism.
This will have serious consequences for the genuine economy, impacting businesses, consumers, and savers who benefit directly from or from banks’ participation in U. S. capital markets, and further hurting U. S. economic growth.
In fact, we are already seeing this negative effect continue as many companies begin to incorporate the expected changes into some tools in the long term, and in other cases, have indicated their goal of reducing certain business sectors.
Regulators did not fully address those effects on money markets because, in our view, they did not conduct the physically powerful and mandated research before publishing the proposal.
As I mentioned, regulators have announced their goal to make changes, but what will they be?What facets will be changed? Satan is in the details.
In reality, the most prudent direction would be for the agencies to withdraw the proposal and repropose the entire rule for public comment.
Any new proposal will need to involve a comprehensive holistic review of the entire capital framework and economic research demonstrating the benefits and pricing of the proposed changes.
Specifically, SIFMA recommends that the following ten key adjustments be made to the rule:
1) Overlap with voltage controls/other prudential requirements: there will be a full assessment of how the proposal would interact with and overlap with other prudential requirements, namely the stress control framework, as well as the GSIB supplement and long-term debt requirements.
2) The interaction between the global market shock (GMS) and the FRTB: Regulators address the overcapitalization of the market threat between those two frameworks, for example by applying the FRTB to the electronic trading book on a post-GMS surprise basis. the annual restriction of the Capital Stress Buffer (SCB) to the U. S. Standard Method only. This is to prevent overcapitalization of the CVA and operational threat measures that are already factored into the broader approach to threat-based choice.
3) Diversification: As a component of FRTB’s internal models and standardized approaches, regulators give more credit to diversification and hedging activities to better align with actual threat exposures and praise smart threat control practices.
4) NMRF and FLAT: In the FRTB part of the proposal, changes need to be made to mitigate the effect of non-modelable threat points (NMRFs) and the P loss attribution test.
5) Credit Valuation Adjustment (CVA): Client-cleared derivatives will be excluded from the scope of the CVA in a manner similar to the technique adopted in other jurisdictions and the threat weights will be adjusted to reflect the other degrees of regulation faced by a bank’s monetary counterparties. are subject. subject to.
6) Securitisations: The proposed framework for securitisations will be adjusted to avoid undue negative effects on a wide range of asset-backed securitised products that businesses and households rely on to finance their activities, adding mortgages and credit cards.
7) Securities Financing Transactions (SFTs): Consistent with the technique adopted in all other primary jurisdictions, the United States does not adopt the SFT valuation haircut framework, as this would have significant adverse effects on critical debt and securities lending markets.
8) Investment Grade Counterparties and Collateral: Regulators deserve to eliminate the public directory requirement while also assigning lower threat weights to counterparties to avoid unduly penalizing creditworthy counterparties that do not hold publicly traded securities, such as the pension budget and municipal issuers. They deserve to do so, too. Recognize the benefits of secure collateral in terms of threat mitigation to better reflect counterparties’ credit threats.
9) Fee-based services: Regulators deserve to review the proposed threat operating framework, adding the fee-based capital markets services solution, to inspire smart threat control practices and diversified business models.
10) Timeline for entry into force: Agencies allow an appropriate time frame to bring the final Basel framework into force (at least 18 months from the final touch of the final rule).
These are topics that are at the forefront of considerations here at SIFMA and today’s panels give policymakers more ideas to re-analyze their approach.
Now let’s move on to today’s program. First, we will ask our participants what they think about the Basel III Final Proposal and assess its effects on U. S. capital markets, end-users, and the economy as a whole.
We will then delve into the parts of the proposal on capital markets, adding the basic review of the trading book, the adjustment of the valuation of credits, and the framework of valuation cuts in SFTs. We will identify some of the demanding situations similar to those facets of the proposal. proposal and solutions.
We will conclude with a discussion of the proposal’s interactions with other parts of the capital framework, in specific prudential stress tests, the GSIB surcharge and resolution-related capital requirements, as well as an assessment of the future of the proposal.
And now, let’s get started. Sign up to welcome Jelena McWilliams, Managing Partner of the Washington, D. C. office. and Head of Financial Institutions Group Practice in Cravath, Swaine.
Source: IFMS