American Securities Assoc. and Citadel Securities v. SEC
Court: U.S. Court of Appeals (Eleventh Circuit) Amicus Issue: Whether the court should grant injunctive relief to prevent SROs from…
Prepared Testimony of Kenneth E. Bentsen, Jr., President and CEO
Securities Industry and Financial Markets Association (SIFMA)
before the U.S. House of Representatives
Committee on Financial Services
Subcommittee on Financial Institutions and Monetary Policy
September 25, 2024
Introduction
Chairman Barr, Ranking Member Foster, and distinguished members of the Subcommittee, thank you for the opportunity to testify today on the Basel III Endgame proposal and other rulemakings currently being considered by the banking regulators. My name is Ken Bentsen, and I am the President and CEO of the Securities Industry and Financial Markets Association (“SIFMA”).1
I would like to start by commending the members represented on this Subcommittee for their leadership on these important issues, including via the many comment letters on the Basel III Endgame and other capital proposals that members from both parties have submitted to the regulators, as well as through hearings on these and other related topics over the past year.
While bank capital requirements are an undoubtedly complex subject, there is no question that they have material impacts across the entire economy, affecting the ability of corporations, small businesses, governmental organizations, and consumers to fund their activities and manage all types of risks. Given these impacts, it’s crucial that policymakers, including Congress, conduct sufficient analysis and oversight to ensure that bank capital requirements strike the appropriate balance between ensuring financial stability and macroeconomic growth.
In this context, it is worth noting that the quantity of high-quality capital in the U.S. banking system has increased three-fold since the Global Financial Crisis, while total loss absorbing capacity has increased six-fold and liquidity levels have increased twelve-fold. Many independent studies have also found capital levels at the largest U.S. banks to either be at or close to their “optimal” levels.2 And senior policymakers, including Treasury Secretary Yellen, Federal Reserve Chair Powell, and Federal Reserve Vice Chair for Supervision Michael Barr, amongst others, have commented in recent years that the U.S. banking system is strong, resilient, and “well-capitalized.”2 In other words, it appears that capital levels are already robust and any further proposed increases should be sufficiently scrutinized to determine both the tangible benefits, and costs to the broader U.S. economy.
It is particularly important that policymakers strike the right balance when it comes to capital requirements affecting the ability of large banking organizations to act as intermediaries in our capital markets, given that those markets fund roughly three quarters of all economic activity in the United States. This contrasts with other major economies where the vast majority of commercial and economic activity is overly reliant on bank balance sheets and we believe the data has proven the U.S. model to be more efficient, resilient and growth oriented. In fact, the EU and many Asian nations aspire to develop their capital markets to mimic the U.S. model. Excessive capital requirements on banks’ markets activities would negatively impact the depth, liquidity and resiliency of the capital markets and increase costs at the expense of consumers and commercial entities who benefit directly and indirectly from bank involvement in such activities.
Reforming the Basel III Endgame Proposal
SIFMA has expressed deep concern about the Basel III Endgame proposal that was issued last year by the banking regulators, not only because it would significantly increase aggregate U.S. bank capital levels well beyond their current, historically robust levels, but because it inappropriately targets banking organizations’ capital markets activities for some of the largest increases. The industry quantitative impact study conducted on the original Basel III Endgame proposal estimated that capital for large banks’ trading activities would increase by 129% above their current historically high levels because of the Fundamental Review of the Trading Book (“FRTB”) and Credit Valuation Adjustment (“CVA”) changes, impacts that were far greater than the agencies’ original estimates, a consequence of the fact that they did not conduct a proper quantitative impact assessment prior to issuing the original proposal.3
As we and many other commentors explained, the increases arising from the original proposal would not be commensurate with the underlying risks posed by these activities and would have serious knock-on effects for the capital markets and real economy. For example, a PWC study released in June 2024 found that the original Basel III Endgame proposal would cause U.S. economic growth to decline by up to 56bps, equivalent to a reduction in growth of up to 25% over the last 10 years.4 Moreover, these impacts are not purely hypothetical: we have already seen this negative impact occurring as some firms have indicated intentions to scale back specific business lines.5 Finally, by “gold plating” the Basel standards, the U.S. would diverge from the implementation approaches taken in other major jurisdictions such as the EU and UK, undermining one of the goals of the Basel agreement, which was aimed at promoting greater cross-border harmonization and comparability across capital requirements.
The recent comments of Federal Reserve Vice Chair for Supervision Michael Barr earlier this month6, announcing the agencies’ intent to issue a re-proposal of both the Basel III Endgame rule and the related Global Systemically Important Bank (“GSIB”) surcharge rule, was therefore a welcome first step. We are concerned that the re-proposal would still raise capital levels by an additional 9% for the largest U.S. banks above levels that are already comparatively high by international standards, and in contrast to other major jurisdictions where implementation is expected to be closer to capital neutral in the aggregate.
Nonetheless, we commend the agencies for acknowledging the need to make “broad and material revisions” to the Basel III Endgame rule based on their analysis of the data collected after the original proposal was issued and the comments they received, and we look forward to providing our comments and analysis on both the re-proposals and QIS once they are released. In evaluating the rule re-proposals, we will be looking to see whether and to what extent they address our key recommendations.
These include: