Prudential Regulation

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

At its root, prudential regulation refers to showing care and forethought.

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. As a result, 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.

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. We continue to advocate for progress on the Core Principles for Regulating the Financial System and an overall recalibration of rules, which will reduce uncertainty, as current rules are overlapping, duplicative, and contradictory. As outlined in our comments to Treasury on capital and liquidity requirements, we believe there are significant issues that impact U.S. competitiveness that need to be addressed.

For one, liquidity and funding requirements, along with some of the capital requirements, promote certain business lines and types of funding over others without data to justify this. In fact, calibrations of liquidity requirements do not reflect true liquidity characteristics, and they’re more stringent in the United States than international standards, contributing to fragmentation within the industry. As well, the U.S. G-SIB capital surcharge is excessively conservative compared to the surcharge in other countries.

At the global level, we’re working through our global affiliate the Global Financial Markets Association to monitor the latest Basel III/IV Agreement, including any recalibration adjustments made through the QIS process prior to the implementation in 2022, and we welcome the reduced uncertainty resulting from BCBS’s finalization of this agreement.

We also welcome the recent Basel revisions to the FRTB and trust that BCBS will apply similar scrutiny to the current package of measures, which have been proposed to be implemented by 2022. Given the complexity and breadth of these new rules, it will be vitally important that regulators ensure the industry has sufficient time to put in place the required infrastructure to comply with the new rules, and so, we look forward to further review.

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