Prudential Regulation

Since the crisis, the financial industry has built up significant capital to enhance the resiliency of the financial system.

A proxy for the entire financial system, firms subject to the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) now have more than $1 trillion of Common Equity Tier 1 capital (CET1) – an increase of 71% since 2009. Their average CET1 ratio is 11.8%, well above the 7% minimum requirement and even greater than the maximum regulatory requirement inclusive of the highest G-SIB surcharge. It is also estimated that, for the largest financial institutions, increases in capital and the introduction of convertible long-term debt as required by the TLAC rule has substantially increased total loss bearing capacity from roughly 15% in 2008 to more than 25% in 2018.

With the adoption of numerous conservative prudential regulatory requirements, banks now hold excessive levels of capital and liquidity that are increasingly disconnected from the level of risk they incur. Although these levels have undoubtedly increased resiliency, they come at a cost: the more capital required, the less deployed into the economy.

Prudential and market regulators have set out to tailor and improve upon the post-crisis regulatory regime, executing on recommendations put forth by the Treasury Department to rebalance and modernize financial regulation. To that end, industry and regulators have been examining recalibrations to several major rules adopted over the last ten years.

Of note, regulatory agencies issued revisions to the Volcker Rule in August 2019 to reduce its compliance-related inefficiencies and implementation of tax reform is underway. Policymakers and regulators should take steps to ensure prudential regulations promote the stability of the financial system but do not negatively impact capital formation and economic growth, notably the implementation of Basel IV and recalibration of certain provisions under Basel III, including:

  • Standardized approach for counterparty credit risk (SA-CCR);
  • Supplementary leverage ratio (SLR) and enhanced supplementary leverage ratio (eSLR);
  • CCAR requirements;
  • Stress capital buffer (SCB) requirements; and
  • Fundamental review of the trading book (FRTB).

Care and consideration must also be given to ensure the final Basel III agreement does not increase capital requirements in the U.S. as well as to congressionally mandated tailoring for domestic and foreign banking organizations (FBOs).

SIFMA works to facilitate a dialogue between the industry and its regulators to help ensure that prudential regulations are relevant components of sound risk management practices, supporting the stability of the financial system.

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