Prudential Regulation

Prudential regulation requires banking organizations to prudently measure and manage risks, hold adequate capital and liquidity, and have in place workable recovery and resolution plans.

Our regulatory regime must account for the vital role the capital markets play in providing credit and financing the real economy, particularly as regulators consider the finalization of elements of the Basel III Endgame and the GSIB surcharge proposals, especially including the Fundamental Review of the Trading Book (FRTB) and Credit Valuation Adjustment (CVA) of the Basel III Endgame. Those rules must be implemented in a manner that does not overly penalize banks’ capital markets activities, which in turn could reduce liquidity in vital corporate and other funding markets, thereby hurting growth in the real economy.

SIFMA supports appropriate regulation of the capital markets and their participants by both market regulators, who have decades of experience in promulgating rules and supervising the marketplace, as well as prudential regulators. Relative to the international Basel standards, U.S. prudential rules generally impose significantly higher capital and liquidity requirements on banking organizations with significant capital markets operations. This has increased costs to banking organizations and the economy as a whole and may have reduced market depth for a wide variety of corporations and other end-users, particularly during periods of economic stress.

This has also had another effect: transforming U.S. banking regulators into impactful supervisors of the capital markets along with the oversight role traditionally played by the SEC and CFTC. This has created duplications in the capital and liquidity requirements between market and prudential regulators as well as lessened the efficiencies by increasing costs to firms and, in turn, end users. It is thus crucial to align and allow for mutual recognition of, to the extent possible, the capital and liquidity requirements set out by the U.S. banking regulators and the market regulators.

B3E Blog Series

Read SIFMA’s blog series on the Basel III Endgame reforms to explore the impact of U.S. bank capital requirements on the capital markets:

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