House Financial Services Subcommittee Issues Testimony From Americans for Tax Reform Director Bashur
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Chairman Barr (R-Ky.), Ranking Member Foster (D-Ill.), and members of the subcommittee, thank you for the invitation to testify today. My name is
I am here today to talk about the federal government's excessive regulation of the
What is most worrisome is that the
The Basel Committee includes the
Overall, my concern is that the American public does not have a clear understanding of how decisions are made at these organizations and how our regulators use this information to regulate and supervise America's financial sector.
1 https://www.bis.org/bcbs/membership.htm.
2 https://www.fsb.org/wp-content/uploads/FSB-Articles-of-Association.pdf.
3 https://www.ngfs.net/en/about-us/membership.
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History
Over the course of our nation's history capital requirements have become increasingly more complex and burdensome. Regulations on top of more regulations has become the mainstay. But have regulators adequately accounted for the costs of the new regulations? Do the marginal benefits of increasing capital requirements outweigh the marginal costs? In my opinion the answer is no. But the bigger question is who gets to make these decisions? For decades, central bankers from around the world have convened in
You might ask, where in federal statute does it say that
Ultimately, it is up to
The Basel Committee and Capital Requirements Today
The capital standards adopted by the Basel Committee have wrongly taken precedence over the authority invested in
The
4 https://www.bis.org/about/index.htm?m=1001.
5 https://www.justice.gov/sites/default/files/jmd/legacy/2014/05/01/act-pl79-404.pdf.
6 https://www.law.cornell.edu/wex/separation_of_powers_0#:~:text=The%20Checks%20and%20Balances%20syste m%20provides%20each%20branch%20of%20government,branch%20from%20becoming%20too%20powerful.
7 https://www.bis.org/bcbs/charter.htm.
8 https://fam.state.gov/fam/11fam/11fam0720.html.
9 https://www.americanbanker.com/opinion/basel-committee-has-outsize-influence-over-american-banks.
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The Basel Committee issued its first bank capital regulatory framework in 1988.10 Since then, capital requirements have become increasingly more complex and stringent. The basis for the regulators' new proposal stems from themost recent iteration of bank capital regulations, Basel III Endgame.11
In the Basel Committee's charter, members are committed to seven responsibilities. Three of them are notable:
* implement and apply [
* undergo and participate in [
* promote the interests of global financial stability and not solely national interests, while participating in [
Based on these points, the Fed,
Since 2011, the Government Accountability Office (GAO) has been sounding the alarm over the federal financial regulators' reluctance to elevate supervisory actions when it is necessary to stymie irresponsible bank behavior. This is relatively concrete evidence that the recent bank failures were not, as the self-evaluation from the Fed asserted, a result of bipartisan legislation...
11 https://www.bis.org/bcbs/publ/d424.htm.
12 https://www.bis.org/bcbs/charter.htm.
13 https://www.imf.org/external/standards/scnew.htm.
14 Id.
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...enacted in 2018 that tailored bank regulation.15 Rather, the bank failures are a result of the regulators' continued failure to enforce regulations that are already on the books.
In the past,
* SVB was already subject17 to various enhanced prudential standards under the Fed's Regulation YY, including a requirement to perform internal liquidity stress tests and maintain a contingency funding plan to address potential runs by its depositors.18 The fact is that SVB failed its internal liquidity stress test for a 30-day stress period and Fed examiners failed to follow up adequately.
* SVB was already required to have a risk committee and a chief risk officer to report and resolve any "risk-management deficiencies in a timely manner."19 Last year SVB neglected to fill the chief risk officer position for eight months, and by the Fed's own admission, Fed staff could have issued a violation citing Regulation YY, but they chose not to.20 Clearly, regulations were not the problem; rather, it was the failure to enforce the rules already on the books that led to SVB's receivership.
* SVB was not subjected to the liquidity coverage ratio (LCR), but it was required to undergo quarterly internal liquidity stress tests.
* It is worth noting the market value of SVB's bond portfolio declined because of the Fed's rapid interest rate hikes. This exposed SVB to substantial interest rate risk (IRR), which ultimately put SVB in a position where it could not liquidate enough assets to fulfill its customers' deposit withdrawals. As outlined in SVB's annual
15 https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf.
16 https://www.congress.gov/bill/115th-congress/senate-bill/2155.
18 https://www.ecfr.gov/current/title-12/chapter-II/subchapter-A/part-252.
19 https://www.law.cornell.edu/cfr/text/12/252.22.
20 https://www.wsj.com/articles/svb-silicon-valley-bank-collapse-chief-risk-officer-f6e1fcfd.
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...undergo stress testing every other year.21
The real source of SVB's demise was the Fed's failure to promptly supervise and enforce rules on SVB. According to the GAO's preliminary report on SVB and Signature, the GAO warned the
In 2011, the
In a 2015 report, GAO critiqued regulators again.24 The 2015 report found that "regulators could have provided earlier and more forceful supervisory attention to troubled institutions" in the 1980s savings and loan crisis and the 2008 financial crisis.
Lastly, the Fed did not prioritize supervision of the actual financial risks embedded in SVB's IRR.
21 https://ir.svb.com/financials/sec-filings/default.aspx.
22 https://www.gao.gov/assets/gao-23-106736.pdf.
23 https://oig.federalreserve.gov/reports/Cross_Cutting_Final_Report_9-30-11.pdf.
24 https://www.gao.gov/products/gao-15-365.
25 https://www.davispolk.com/insights/client-update/silicon-valley-bank-failure-different-view-federal-reserve-oigreport?utm_source=vuture&utm_medium=email&utm_campaign=2023-1018%20silicon%20valley%20bank%20failure%20%e2%80%93%20a%20different%20view%20of%20the%20federa l%20reserve%20oig%20report.
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...similar to additional tier 1 (AT1) bonds, which were wiped out by Swiss regulators when
Three alternative legislative solutions are ripe to pursue:
* Ensure mark-to-market accounting for all bank securities.
- Accounting tweaks, such as marking-to-market a bank's hold-to-maturity (HTM) securities portfolio, can offer transparency to bank shareholders, bondholders, and depositors.
- SVB's idiosyncrasies, such as a high-level of venture capital and tech startup depositors and borrowers, should not distort how accumulated other comprehensive income (AOCI) is interpreted. In general, unrealized losses are not a problem if the bank does not have to sell the assets at fair market value. SVB's depositor base combined with the Fed's aggressive monetary tightening put it in a unique position. Disclosure of mark-to-market accounting enhances transparency for shareholders and bondholders without the need to change capital calculations for all banks with more than
* Pass legislation such as the American Financial Institution Regulatory Sovereignty and Transparency Act29
- This bill requires federal financial regulators to be more transparent about international negotiations and meetings with groups such as the Basel Committee, FSB, and NGFS.
* Further deregulating reciprocal deposits
- EGRRCPA largely removed reciprocal deposits from the definition of a "brokered deposit" to unleash more bank products that allow more deposits to be insured under the current deposit insurance limit. Currently, reciprocal deposits are considered "non-brokered" if they amount to no more than
26 https://www.ft.com/content/2facda29-a68c-459e-b3a2-e797da37e9a9.
28 https://www.federalreserve.gov/newsevents/speech/barr20230710a.htm.
29 https://www.congress.gov/bill/118th-congress/housebill/4823/text?s=2&r=2&q=%7B%22search%22%3A%22American+Financial+Institution+Regulatory+Sovereignty +and+Transparency+Act%22%7D.
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...leeway to pursue these products could benefit both household and business depositors.
- Businesses and individuals can take advantage of these private sector alternatives. For example, some community banks31 and regional banks32 offer insured cash sweep programs that allow depositors to distribute their cash around to different accounts "to money market deposit accounts at other
Capital Requirements
The regulations jointly issued by the Fed,
It is also important to note that banks with less than
The
31 https://www.bankofutah.com/business/treasury-management/sweep-accounts.
33 88 FR 64030
35 88 FR 64030 36 https://thefinancialbrand.com/news/banking-trends-strategies/durbin-2-0-threat-banks-credit-unions-brace-forsignificant-impact-154844/.
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The Basel Committee's influence on the proposed rule is pervasive. The proposed rule uses a definition of "small or medium-sized entity" that "is generally consistent with the definition of an SME under the Basel III reforms."37 The regulators also determined components of operational risk by using an "analysis undertaken by the Basel Committee."38 The proposed rule also modifies the "market risk capital requirements in a manner generally consistent with the revised framework of the Basel Committee."39 Additionally, the "agencies are applying a similar methodology for calibration of credit spread risk weight for sovereigns as the Basel Committee used for calibrating risk weights for other asset classes."40
The regulators try to justify the heightened capital requirements in the proposed rule. The rule concludes "that there is room to increase capital requirements from their current levels while still yielding positive net benefits." But other than citing certain academic papers, no substantive economic analysis is conducted to prove their point.
Even the regulators admit the academic literature is mixed:
The changes in required capital drive the cost of funding for each asset class, which may in turn influence banking organizations' portfolio allocation decisions. Based on the estimated sensitivity of lending volumes to capital requirements found in the existing literature, the agencies estimate that changes in asset class specific risk weights would change banking organizations' portfolio allocations only by a few percentage points.41
The regulators admit that banks would have to adjust their balance sheets to accommodate the new capital requirements, but without any supporting evidence, surmises that the adjustments would be mild.42 The federal government is directly influencing how banks must build their balance sheets.
There are two issues with the way capital requirements are drafted in this country: (1) policy and (2) procedure. The regulators have neglected the costs of the proposed rules and instead decided to focus on the benefits. For example, one study shows that "for every 1% increase in capital minimums, lending rates will rise by 5 to 15 basis points and economic output will fall 0.15% to 0.6%." 43 In the long run, higher capital requirements may also "reduce competition by acting as an entry barrier for new banks." 44
The procedure for developing the new capital requirements has circumvented
37 88 FR 64051, n.92
38 88 FR 64086
39 88 FR 64092
40 88 FR 64120, n.335
41 88 FR 64170
42 88 FR 64170
44 Id.
45 West Virginia v. EPA, No. 20-1530 (
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...requirement regulations, there needs to be "clear congressional authorization." So far,
One
The new proposed rules are highly technical, but at a high level, they require banks with more than
According to the Fed's own analysis the new requirements are significantly higher:
Further breakdown by category shows that the proposal would increase binding common equity tier 1 capital requirements by an estimated 19 percent for holding companies subject to Category I or II capital standards, by an estimated 6 percent for Category III and IV domestic holding companies, and by an estimated 14 percent for Category III and IV intermediate holding companies of foreign banking organizations. The impact assessment focuses on common equity tier 1 capital because it is the highest quality of regulatory capital and its minimum regulatory requirements are risk-based.48
The regulators are also proposing a rule to make changes to the global systemically important bank holding company (G-SIB) surcharge.49 This requirement to hold extra equity capital only applies to the Category I banks. The regulators also issued a third proposed rulemaking to force banks to issue long-term debt to be used in the event of a bank failure.50 This would leverage banks and increase instability.
The proposed rule based off the Basel Committee framework has not been condoned by
46 https://www.fdic.gov/news/speeches/2023/spoct0423a.html.
47 Id.
48 88 FR 64169, n.464
49 https://www.federalreserve.gov/aboutthefed/boardmeetings/frn-gsib-20230727.pdf.
50 https://www.occ.treas.gov/news-issuances/federal-register/2023/88fr64524.pdf.
51 https://www.justice.gov/sites/default/files/jmd/legacy/2014/05/01/act-pl79-404.pdf.
52 Id.
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...have ignored the proper procedures by taking actions into their own hands, when in fact
Private Credit Private credit funds are a market solution to a government-imposed headache. Private funds filling the financing void is just an example of the free market working to solve the problem the government created in the first place.53 Government regulation in the form of
Climate Risk
In
Another workstream on supervision--chaired by an official at the Office of the Superintendent of Financial Institutions of
53 https://www.wsj.com/finance/fed-rate-hikes-lending-banks-hedge-funds-896cb20b.
54 https://www.govinfo.gov/content/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf.
55 https://www.ft.com/content/5612cba3-1580-4003-a0ac-6623cbe28ee6.
56 https://www.ngfs.net/sites/default/files/workstream_monetary_policy_mandate.pdf.
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...frameworks and practices." Number one, these statements of policy have no legal bearing in the
According to the NGFS's charter, the Fed, as a member of the organization, must commit to:
i. Actively contributing to the work of the NGFS and dedicating the appropriate resources in their organisation to support their participation;
ii. Appointing relevant expert(s) to participate in at least one NGFS Workstream;
iii. Raising awareness to the work of the NGFS in their jurisdiction, their geographic area and within the international or regional standard setting, regulatory, supervisory and central bank bodies they are involved in;
iv. Participating when appropriate in the outreach exercises conducted by the NGFS vis a vis external Stakeholders.58
Not only is the Fed participating in the workstreams and contributing financial resources to the organization, but it is also required to promote the NGFS's work in the
These concerns must also be raised with the other
Additionally, the Fed's
57 https://www.federalreserve.gov/aboutthefed/section2a.htm.
58 https://www.ngfs.net/sites/default/files/media/2023/04/27/ngfs_charter_-_27_april_2023.pdf.
59 https://www.federalreserve.gov/publications/files/financial-stability-report-20231020.pdf.
60 Id.
61 https://www.fdic.gov/news/board-matters/2023/2023-10-24-notice-dis-b-fr.pdf.
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Although climate policy is outside the purview of this committee, this segues into the topic of how to define what counts as material information for investors. Accordingly, I applaud Rep.
The
The SEC Chair
The FSB member jurisdictions are committed to:
(a) pursue the maintenance of financial stability;
(b) maintain the openness and transparency of the financial sector;
(c) implement international financial standards; and
(d) undergo periodic peer reviews, using among other evidence
(e) take part in implementation monitoring of agreed commitments, standards and policy recommendations.68
Based on this list, the
62 https://www.congress.gov/bill/118th-congress/house-bill/4790/text?s=1&r=1.
63 https://www.federalregister.gov/documents/2022/04/11/2022-06342/the-enhancement-and-standardization-ofclimate-related-disclosures-for-investors#citation-12-p21336.
64 87 FR 21341
65 87 FR 21340, 21341
66 87 FR 21410
67 https://www.sec.gov/spotlight/cybersecurity-enforcement-actions.
68 https://www.fsb.org/wp-content/uploads/FSB-Charter-with-revised-Annex-FINAL.pdf.
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It is abundantly clear that the
It is also notable that
Conclusion
What is clear is that the executive branch has assumed so much power over the years that in certain cases, such as with climate risk and capital requirements, it has decided to assume the powers of the legislative branch and determine how to best regulate private American enterprises.
Thank you again for inviting me to this hearing. I look forward to answering your questions.
69 https://www.congress.gov/bill/118th-congress/house-bill/4790/text?s=1&r=1.
70 https://docs.house.gov/meetings/BA/BA00/20230727/116295/BILLS-118-HR4823-L000583-Amdt-6.pdf.
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Original text here: https://docs.house.gov/meetings/BA/BA20/20231107/116543/HHRG-118-BA20-Wstate-BashurB-20231107.pdf
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