House Financial Services Subcommittee Issues Testimony From MRV Associates Managing Principal Valladares (Part 1 of 2)
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Chairman
It has only been fifteen years since Lehman Brothers collapsed and wreaked havoc on people's lives, even in places around the globe, very far from
"Financial instability often follows periods when financial institutions, like investors and policy makers, have underestimated risks."2
Every time bank regulators in any country want to update bank regulations or implement new ones, there are always voices that claim that regulation will reduce lending or hurt an economy in other ways. Since 2010 when Basel III and Dodd-Frank rules started being designed and implemented incrementally,
Also, imagine how much more capitalized
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1 Reinhart, Carmen, and
2 Behavioral Finance and Financial Stability,
3 "100 Most Penalized Companies," Good Jobs First, Violations Tracker,
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Even as robust as those frameworks are, however, they probably would not have been enough.
Fiscal and monetary policy stimuli bolstered banks' balance sheets and were critical to economic and financial stability.4
Banks are not at historically high levels of capital.5 And the current measures of capital do not include all risks. Importantly, pandemics, country, economic, credit, market, liquidity, and operational risks continue to manifest themselves differently. Bank rules need to be reviewed and revised periodically. Presently, banks are being impacted by the elevated interest rate environment and rising defaults in some consumer and corporate sectors. In addition to those risks, banks now also face cybersecurity,6 climate change,7 rising civil unrest domestically, and geopolitical threats. It is imperative that US banks are resilient,8 especially due to the aforementioned threats. Unfortunately, those risks are barely covered if at all, by the so-called Basel III Endgame or the capital or liquidity stress tests required by Title I of the Dodd-Frank Act. Anytime that a large American bank fails, or even threatens to do so, Americans' jobs and their mental and emotional well-being are threatened. Moreover, given the size of our banks and how they are interconnected here and with corporations and institutions around the world, there are also adverse consequences to the global financial system when there are significant weaknesses here.
By updating changes to Basel III and Dodd-Frank,
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4 Horwich, Jeff. "Is the COVID -19 financial shock a good measure of bank strength?"
5 Haubrich, Joseph G., "A Brief History of
6
7
8
9 By improving data quality collection, using financial derivatives, selling loans and securities into special purpose vehicles, reducing investments in very illiquid assets or in complex securitizations and derivatives, banks can reduce risk weights. In the market, this is known as risk optimization.
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Even before their Notice for Proposed Rulemaking, bank regulators inform the industry that they are working on updating or creating new rules. Regulators then launch the proposed rules and take comments from the public. The public comment is at least 90 days; in the case of the Basel III Endgame, it is over 120 days. After the comment period, regulators analyze the comments, and many months later, they finalize the rule. Once the final rule is announced, banks are normally given a timeline of one to two years to incrementally implement rules. Given the length of the process and that banks do not implement rules all at once, banks' professionals have ample time to conduct internal gap analysis to determine what personnel or technological resources they need to be able to comply with the rules. Under no circumstances should the proposed capital and bank resolution rules be withdrawn. The process is working as it should.
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BANKS ARE SPECIAL
Financial institutions, including banks, do fail. And when they do, their adverse impact is felt not only domestically, but also globally given the significant interconnections between financial institutions, corporations, and ordinary individuals. In turn, financial or economic instability in other countries comes back to hurt our banks, companies, and individuals. Of the twelve, largest financial institution failures in the
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Chart: The 12 Largest Financial Institution Failures (by asset size)10
Banks are particularly special,11 because their loans help individuals and companies of every size reach our goals for economic vitality and growth. Banks are also crucial to any economy because they are interconnected to each other, as well as to school districts, municipalities, pension funds, securities firms, the insurance and reinsurance sector, securities firms, hedge funds, asset managers, wealth funds, not-for-profit foundations, home offices and sovereign wealth funds.
These interconnections exist, because banks lend to these entities or are in derivative contracts with many of these actors, and because school districts, municipalities, and the aforementioned other financial institutions (OFIs) also invest in stocks and bonds issued by banks. Often banks also manage the payroll and provide other important services to these entities. The collapse of a bank or even the threat thereof, almost immediately hurts the well-being of all of these entities, not to mention that of their employees. In short, bank instability has an outsized influence on the health of "
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10 Data compiled by the author from
11 Corrigan,
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564 US banks have collapsed since 2001; over 50% failed during the financial crisis of 20082010. Since Basel III and Dodd-Frank rules started being implemented in 2012, far fewer banks have failed.
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Chart: Recent Bank Failures in the
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Bank crises lead to higher unemployment. During the financial crisis of 2007-2009, for example, unemployment in the
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12 "The Recession of 2007-2009,"
13 "The Great Recession and the Job Crisis,"
14 "Spotlight on Statistics The Recession of 2007-2009,"
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Even after financial crises end, unemployment tends to persist and wages15 are slow to grow, if they even rise at all.16 In the case of the US, the damage of the financial crisis was felt for many years after the recession had ended.17 Those without college degrees suffered more than those with college degrees, And people of color,18 with or without college degrees, suffered more than their white counterparts.
Bank crises cause significant loss of wealth. During the 2007-2009 financial crisis, wealth losses in the
Banks and other corporations often barely pay sufficient severance to those whom they have laid off. The unemployed people then must rely on their savings if they have any. They then become a challenge for state tax coffers since the unemployed will collect benefits. Bank executives, boards of directors, or the big risk takers, who are the ones that cause banks to fail, are not required to pay more into state coffers when they cause a crisis.
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INTERNATIONAL STANDARD SETTERS
Given the interconnections between financial institutions, corporations, and individuals, several international standard setters exist with the members' focus being financial transparency and stability. The
For the purposes of this hearing, the most relevant international standard setters in which the
The Financial Stability Board
The Financial Stability Board (FSB) makes recommendations about the stability of the global financial system to international standard setters. It coordinates with standard setters such as the
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15 "Unemployment and Earnings Losses: A Look at Long-term Impacts of the
16 "Spotlight on Statistics The Recession of 2007-2009,"
17 Center on Budget and Policy Priorities. "Chart Book: The Legacy of the Great Recession,"
18
19
20 "Standard Setting Agencies,"
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In 2015, the FSB issued the Total Loss Absorption Capacity Standard for Systemically Important Banks. The purpose of the TLAC standard is to give guidance to countries to require "sufficient loss-absorbing and recapitalization capacity available in resolution for authorities to implement an orderly resolution that minimizes impacts on financial stability, maintains the continuity of critical functions, and avoids exposing public funds to loss." 22 Overwhelmingly, globally systemically important banks (G-SIBs) have been the focus of the design and implementation of these standards.
In 2019, in its Review of the Technical Implementation of the Total Loss Absorption Capacity Standard, the FSB found that progress globally had been "steady and significant in both the setting of external TLAC requirements by authorities and the issuance of external TLAC by GSIBs.
TLAC has been instrumental in enhancing the resolvability of G-SIBs, strengthening cooperation between home and host authorities, and boosting market confidence in authorities' capabilities to address too-big-to-fail risks."23
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21 FSB.
22 "FSB Issues Final Total Loss-Absorbing Capacity Standard for Global Systemically Important Banks," Financial Stability Board,
23 "Review of the Technical Implementation of the Total Loss-Absorbing Capacity (TLAC) Standard," Financial Stability Board,
24 Prudential regulation encompasses risk management, capital, liquidity, and leverage requirements to make banks safer and more sound.
25 The Group of 10, established in 1962, is comprised of eleven countries:
26 History of the Basel Committee, BCBS.
27 The Basel Committee Charter was updated
28 The Basel Accord was finalized in 1988 and has been revised several times. The latest version updated was updated in 2017; the update is often referred to as the Basel III Endgame.
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FINANCIAL REGULATION IN THE
Financial regulation is a very broad term and encompasses multiple areas. In the
Source: Government Accountability Office (GAO), Financial Regulation, GAO-16-175, February 2016.30 For decades, off- and on-site supervision of banks in the
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29 Labonte, Marc. "Who Regulates Whom? An Overview of the
30 "Financial Regulation: Complex and Fragmented Structure Could Be Streamlined to Improve Effectiveness," Government Accountability Office,
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THE BANKING SECTOR SINCE BASEL III and DODD-FRANK
Well-regulated banks are essential to any economy; the failure of one bank, especially a large one can lead to systemic risk.31 "The banking system . . . is a 'public good' that benefits the nation over and above the profits that it earns for the banks' shareholders. Systemic risks to the banking system are risks for the nation as a whole. Although the management and shareholders of individual institutions are, of course, eager to protect the solvency of their own institutions, they do not adequately take into account the adverse effects to the nation of systemic failure. Banks left to themselves will accept more risk than is optimal from a systemic point of view. That is the basic case for government regulation of banking activity and the establishment of capital requirements."32
To keep up with changes in the global economy, markets, and the size and complexity of banks, from time to time we must revisit risk management, liquidity, capital, and resolution requirements. The American people, especially those, who are not even beneficiaries of banks' profits should be at the heart of what legislators and regulators design in terms of laws, regulations, and supervisory processes for all financial institutions, but especially banks.
Even academics who have been advocates of deregulation are starting to see that less regulation is not necessarily a good thing.33 Increased bank regulations do not adversely affect growth in gross domestic product. Whereas bank crises do cause GDP to decline. In fact, bank crises are always in the top five causes of sovereign default. Even when bank crises do not cause a sovereign default, they do often affect the cost of borrowing of the sovereigns, making it harder and more expensive for them to borrow for the needs of their countries.
When banks get into trouble from a capital or liquidity perspective, that is when they curb their lending. When companies no longer have access to the level of loans they need, they lay people off, especially if companies are already leveraged to begin with.
Bank Regulations and Lending
The statistician
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31 "Systemic risk is the risk that a default by one financial institution will create a "ripple effect" that leads to defaults by other financial institutions and threatens the stability of the financial system." Hull, J., Risk Management and Financial Institutions, 2012.
32 Feldstein, Martin. The Risk of Economic Crisis,
33 Wallheimer, Brian. "Why Less Regulation Isn't Necessarily Better," Chicago Booth Review,
34
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Recent Basel analyses showed greater improvements for banks globally that were more heavily impacted by the Basel III reforms, "suggesting that the reforms were an important driver of this increased resilience. Greater resilience did not come at the expense of banks' cost of capital, as banks more heavily impacted by the reforms also saw a greater decrease in their cost of capital.
There is no robust evidence and only some indication that banks with lower initial [Common Equity] CET1 ratios and [Liquidity Coverage Ratio] LCRs had lower loan growth than their peers. As the overall intent of the reforms has been to strengthen the banking system and mitigate contagion to other parts of the financial system, the report also analyses market-based systemic risk measures, which showed improvement following implementation of the reforms."35 Globally, bank lending grew in aggregate after the Basel III reforms both for banks above the initial median of a given regulatory ratio and banks below the initial median of that regulatory ratio, for each of the four regulatory ratios under analysis.36 Importantly, increases in capital requirements do not have to lead to cuts in lending, especially since banks can shed riskier assets to reduce their risk weights.
In 2020,
Importantly, when banks are better capitalized, their probability of default declines. This leads to a decline in banks' borrowing costs. Credit rating agencies, lenders, and bond investors react favorably when banks' credit quality is higher. As Professor Juliane Begenau points out in her research, the reduction in cost of borrowing allows banks to continue lending and in fact can allow them to lend more than when their credit quality was poorer.39 The
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35 "Evaluation of the Impact and Efficacy of the Basel III Reforms,"
36 "Evaluation of the Impact and Efficacy of the Basel III Reforms -Annex,"
37 "Bank Capital Regulation ," Global Financial Development Report, 2019/2020,
38 Cecchetti, Stephen and
39 Begenau, Juliane "Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model,"
40 Thankor, Anjan and
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Banks that perform poorly on stress tests because they are not well capitalized, tend to reduce lending. Yet, "those banks may not increase the supply of loans that perform well under the stress test. This portfolio rebalancing thus can lead to an overall reduction of credit supply relative to banks that don't experience large stress-test losses."41
Additionally, in 2019 the Financial Stability Board found that Basel III rules had not hurt lending to small-medium enterprises in the Basel Committee jurisdictions.42 In fact, what impacts small businesses adversely are often poor due diligence and underwriting processes at banks.
According to an analysis conducted by
* Lack of knowledge of their credit risk and how they can improve their business credit standing.
* Opacity of banks' credit assessment process and expectations.
* Inconsistent requirements among banks in terms of the lending process, necessary data, and documentation.
* Difficulty in maintaining current and accurate financial reporting due to manual processes and lack of expertise.43
Bank regulations do not need to lead to a reduction in loans to credit worthy individuals and companies of all sizes to meet capital ratios. A capital ratio is comprised of a numerator and a denominator. Banks can increase the numerator, that is, they can issue more equity and loss absorbing debt issuance. Banks can also increase the numerator by increasing their retained earnings and reducing dividend payouts and share buybacks. To reduce the denominator, banks can reduce risks. For example, banks can reduce holdings of riskier assets such as poor credit quality loans, below investment grade bonds, securitizations, and derivatives that consume more capital. Moreover, they can use credit and interest rate derivatives to mitigate risks in their loans, securities, or derivatives assets, which in turn reduces their risk weights helping them meet capital requirements.
Bank Credit Quality
As of
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41 Brauning, Falk and
42
43
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Chart: Current Credit Ratings
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Asset Growth
At the beginning of 2010, when many of us were still reeling from the financial crisis, assets at banks in the
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44 FitchLearning,
45 Ibid.
46 "Total Assets,
47
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J.P. Morgan now represents about 14% of total
Source: Visual Capitalist.49
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Earnings
In 2010, banks' net income was about
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48 "Large Commercial Banks," Federal Reserve Statistical Release,
49 Koop, Avery. "Visualized: The 100 Largest
50 "Quarterly Banking Profile," FDIC Quarterly, Volume 17, Number 3,
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Dividends
In 2022, banks in the
Not only have banks been increasing their dividend pay-outs, they have also significantly increased their share buybacks.52 Both dividends and funds utilized for share buy backs could be used for banks capital or liquidity, increasing their safety and soundness. This would increase their credit quality and lower their cost of borrowing, again helping them continue to lend to the real economy.
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51 "
52 Hirtle, Beverly, and Sarah Zebar. "Bank Profits and Shareholder Payouts: The Repurchase Cycle,"
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Chart: Dividends and Share Repurchases
Twenty-one Large Bank Holding Companies, 2012:Q1-2022:Q3
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Political Contributions
In 2010, banks' political campaign contributions totaled about
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Chart: Commercial Banks, Political Contribution Trends, 1990 - 2022
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Individual banks, as well as trade associations, are significant contributors to political campaigns and wield enormous influence on legislation as well as rule making.
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Chart: Top Contributors From the Banking Sector, 2022
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RENEWED GLOBAL FOCUS ON BANK REGULATIONS
This year's bank failures in the
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54 Hussain, Monsur and
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BASEL III ENDGAME
It is important to consider why Basel Committee members, including the
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Progression of The Basel Accord
Basel Committee members have repeatedly stated their concern about banks' flexibility in use of internal models to measure their credit, market, and operational risk. These measurements greatly influence banks risk weights and hence their capital levels to help them sustain unexpected losses.55
In his excellent paper, 'Math Gone Mad,'
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55
56 Dowd, Kevin. "Math Gone Mad,"
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Whether we are talking about credit, market, or operational risk models, regulatory capital models are comprised of three components: inputs comprised of data if they exist and assumptions, a processing mechanism that transforms the inputs into estimates, and a reporting element that translates the estimates into useful information for business executives. Regulatory capital models could be very useful to market participants, the media, and importantly regulators, if all the three components were disclosed uniformly and in a timely manner to the market; we are very far from having market transparency, which exchange commissions like the US SEC, should really push. Stanford Professor
In 2013, the Basel Committee released an analysis where it found that even banks of a similar profile were coming up with very different risk weights when measuring the credit and market risks of their assets, both loans and securities. At the time, I wrote that the fact that large banks had too much flexibility in their model design, inputs, and calculations, was one of the worst kept secrets on
Model flexibility was a primary driver for the Basel Committee to update the Basel III framework. It finalized the update on Basel III on
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57
58
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Chart: Basel III Reform Summary
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Timeline
In the
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Chart: Basel III Notice of Proposed Rulemaking,
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59
60
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Regulators read and analyze the comments before finalizing the rules. Once the three regulators finalize the rules, they give banks time to implement the rules. In this case, large banks would begin transitioning to the updated Basel III framework on
Additionally, many banks have already been conducting gap analyses to review what personnel or technological resources they might need to comply. Importantly, bank regulators always encourage bank professionals tasked with key regulation implementation roles to reach out to them to discuss if problems are arising with implementation.
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Chart: Basel III Final Rules Global Implementation
Source: Graphic by Davis-Polk.61
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Highlights of Proposed Regulatory Capital Rule
The main drivers of the proposed
The proposed rule consists of amendments applicable to large banking organizations and to banking organizations with significant trading activity.
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Unrealized Losses and Gains
It is important that regulators are proposing that unrealized gains and losses from certain securities be included in banks' capital ratios.
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Operational Risk
The proposed changes to operational risk measurement by the
Operational risk comprises a threat to an institution's earnings and liquidity due to problems with people, processes, technology/systems, and external events (i.e., third party vendors, civil unrest, terrorism, and natural disasters.) Operational risk often plays a very significant role in the cause of a banking crisis. And it certainly played a big part in the 20072009 financial crisis as exemplified by cases of internal and external fraud, over dependence in models, and lack of due diligence in lending and securitization underwriting.62
For fifteen consecutive years, concern about cyber risk security has been in the top ten operational risk concerns of institutions in the financial industry; presently it is the top concern.63
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61 "
62 Examples of settlements and financial fraud,
63 "Top Operational Risks for 2023," Risk.net,
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Chart: Top 10 Operational Risk Concerns For the Financial Industry
Source: Risk.net Staff
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For both globally systemically important banks (G-SIBs) and those that are not G-SIBs, cyber risk security issues are also the top concern.64
Operational risk is a significant source of risk for US banks. Banks lose millions of dollars every year due to failing to identify, measure, control or monitor operational risk exposures. From 2000-
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64 Ibid.
65 "100 Most Penalized Companies," Good Jobs First, Violations Tracker,
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Chart: Banks with the Largest Fines (2000 - 2023)
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The latest available data shows that of the five largest operational risk losses at financial institutions in August four were at banks.
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Top 5 Operational Risk Losses at Financial Institutions in August 2023/66
1. Wells Fargo -
Wells to pay
2.
SocGen to pay
*2.
BNP to pay
3. Allstate -
Allstate pays
4. Wells Fargo -
Wells Fargo to pay
5. Corficolombiana -
Corficolombiana to pay
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66 O.R.X.
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Operational risk identification, measurement, control, and management has long been the most neglected part of overall risk management at banks.67 Until the Basel Committee included operational risk in Basel II in 2006, banks globally tended to define operational risk in different ways, even in the same institution. Not having a uniform decision across an enterprise then makes it very difficult to properly identify, measure, and control operational risk.
Even when operational risk was included in Basel II, it was the least robust part of Pillar I, in comparison to credit and market risks. Additionally, in just about every jurisdiction, banks spent significantly more time trying to comply with credit and market risk measurements, while operational risk received a lot less attention. Moreover, allowing the largest banks the flexibility to use models to measure operational risk has also meant that it is very difficult for market participants to understand the extent of operational risk banks have and how it is being mitigated, if at all, in some cases. Improving the performance of operational risk models would enable bank risk managers "to make more informed risk decisions by better matching economic capital and risk appetite and allows regulators to enhance their understanding of banks' operational risk."68 Under the proposed method to measure operational risk, capital would be calculated using:
* A Business Indicator (BI) metric - a financial statement calculation designed to capture the volume of activities that carry operational risks, a proxy for an institution's risk profile
* An Internal Loss Multiplier (ILM) - a measure of the aggregate historical operational risk losses in relation to the size of an institution69
What is Missing from Basel III NPR?
The proposed rules do not require that regional banks in Category III measure their liquidity risk during periods of economic, credit or market stress. The Liquidity Coverage Ratio is one of the most important changes from Basel II and was finalized in the US Basel III rules in 2015.
Unfortunately, due to the Economic, Growth, Recovery, and Regulatory Relief and Consumer Protection Act of 2018, banks the size of
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67
68 Curti, Filippo, and
69 Carrivick, Luke. "Fed Announces Basel III Endgame," O.R.X.
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THE WALL STREET REFORM and CONSUMER and PROTECTION ACT
Due to the 2007-2009 financial crisis, legislators passed the Wall Street Reform and Consumer Protection Act (also known as Dodd-Frank Act) in 2010. Amongst many important requirements, Title I of the Dodd-Frank Act contains requirements for banks to evaluate their levels of capital and liquidity under economic, credit, and market stress scenarios. Title I also requires large banks to write Bank Recovery and Resolution Plans (living wills.)
Stress Tests
It is important to note that guidance on portfolio and enterprise-wide stress tests for banks has existed under Pillar II of Basel II since 2006. Now, under Basel III, Pillar II recommends that banks have independent professionals who can evaluate the Internal Capital Adequacy Assessment Process (ICAAP) conducted by banks. Pillar II recommends that every quarter banks design their own scenarios to run portfolio and enterprise-wide stress tests. They should disclose scenarios to regulators. Banks are recommended to incorporate interest rate and liquidity shocks on a quarterly basis.70 The key is to disclose the stress test results not only to regulators, but also to the public. Market discipline is at the cornerstone of Basel III's third pillar, 'Risk Disclosures.'
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Figure: General Steps of Stress Tests
Source: Bank for International Settlements, 2013.
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Comprehensive Capital Analysis Review
The Comprehensive Capital Analysis Review (CCAR) under Dodd-Frank's Title I is an annual exercise for the largest banks. The qualitative and quantitative aspects help banks and regulators determine under periods of economic, credit, or market stresses, banks would still be sufficiently capitalized to withstand unexpected losses and continue to serve their important roles as financial intermediaries. Every year the
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70 "Overview of Pillar II supervisory review practices and approaches,"
71 "2023 Stress Test Scenarios,"
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Repeatedly, banks and trade associations have criticized the
Over twenty of the
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72 "2022 Federal Reserve Stress Test Results,"
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Chart: Banks Subject to Stress Tests in 2023
Source:
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Comprehensive Liquidity Analysis Review
Another type of stress test, and receiving far less public attention, is the Comprehensive Liquidity Analysis Review. The Large Institution Supervision Coordinating Committee (LISCC) liquidity program assesses the adequacy of LISCC firms' liquidity position and liquidity riskmanagement practices through both horizontal and firm-specific examinations, in-depth reviews, and analyses conducted throughout the year. The CLAR is the horizontal component of this program. Currently, the
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Figure: LISCC Supervisory Program Structure
Source:
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Scenarios are even more important for liquidity risk measurement than for credit risk, rate risk or operations risk. The need for liquidity arises in very different ways for banking situations. The range of potential risk scenarios is far more varied. "Both the nature and size of a liquidity event vary by scenario. Customer and counterparty options to withdraw indeterminate maturity deposits, draw-under loan commitments and prepay loans will be exercised differently under different conditions."74
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What Is Missing From Current Regulatory Stress Tests?
Currently, not all risks are covered fully, or in some cases at all, in CCAR or CLAR. These are important risks that we need to explore in depth to strengthen our banking system.
Cybersecurity
*
Are banks well capitalized and liquid if there were to be a massive cybersecurity attack?
Climate Change
* Are banks able to identify which of their banking or trading portfolios are impacted by the deleterious effects of the physical and transition risks of climate change and by how much?
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73 "Large Institution Supervision Coordinating Committee,"
74 Matz, Leonard "Scenario Analysis and Stress Testing", in Liquidity Risk Measurement and Management: A Practitioner's Guide to Global Best Practices,
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* Are they prepared for how climate change could affect their fee generating business lines such as investment banking, asset management, or custody services?
* Have banks begun collecting the necessary data and designing models to help them determine what level of capital they will need to sustain unexpected losses brought about by climate change?
Domestic Terrorism and Civil Unrest
* Are banks calculating how rising gun violence, domestic terrorism, or civil unrest can impact their operational resilience?
Geopolitical Risks
* The recent Russian invasion of
Challenges to the dollar as the reserve currency
* Are banks prepared for a day in which the dollar is not the reserve currency anymore as other countries compete against us for that role?
We do not know the answers to the above questions because neither the capital nor liquidity stress tests require that these questions be answered.
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Bank Recovery and Resolution Plans
Dodd-Frank's Title I and II addressed bank resolution in the case of bank failure. Title I requires banks to write a bank recovery and resolution plan in which they describe:
* their hundreds of legal entities and what functions exist
* what internal and external factors could cause a bank to fail,
* how might risk managers solve the identified problems, and
* if the problems cannot be solved, what recommendations does the bank for how it could be resolved.
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Proposal to Expand Resolution Planning
On
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75 "Agencies Propose Guidance to Enhance Resolution Planning at Large Banks,"
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To protect Americans, not only is it imperative that banks not fail, but that if they do, they bail themselves in as opposed to being bailed out by us. To that end, on
Since the proposal to issue long-term debt has barely been released, it is difficult to quantify with certainty how this requirement might impact banks' earnings or ratings. Issuing LTD might initially lead modestly to higher borrowing costs for regional banks. However, the proposed capital increase could lower its borrowing costs if the market and rating agencies interpret better capitalized banks as safer. According to Fitch Ratings, the LTD "proposal would add modestly to existing earnings pressures on ratings but would also reduce loss severity for bank holding company (BHC) senior bondholders and increase protection for bank-level creditors."76 The
I concur with
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76 "Proposed US Regional Bank Debt Requirements to Drive Mixed Rating Actions," Fitch Ratings,
77 "
78 Fanger, David and
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Current and Proposed State of
Category/Asset Size
This
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Appendix I
Recommendations From My Senate Banking Testimony
'Strengthening Accountability at the
Revise Title IV of S2155 to Reinstate Dodd-Frank's Definition of Systemically Important
S2155 gutted essential parts of Dodd-Frank's Title I, such those that designated banks over
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Remove Heads of Banks From Federal Reserve District Boards
While there is debate as to the extent of power of district boards over off-site supervision or onsite bank examinations, it cannot be denied that board members meet repeatedly with presidents and other key members of the
To avoid even the appearance of conflicts of interest, boards would be better served without these individuals on these boards. The boards would be better served by ensuring that they have a diversity of skills sets on their boards that could support them in providing oversight over
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Reform Remuneration for CEOs and Key Bank Professionals
Despite multiple financial crises in my lifetime, not much has been accomplished in reforming how executives and key bank professionals are remunerated. As I know from having worked at two banks, a bank's profitability influences not only how executives are paid, but also, often all the way down to the most junior employees. This means that even when professionals know of wrongdoing at a bank, no one wants to stand up and inform any boss or even more difficult, bank regulators. Remuneration that is tied to bank profitability also influences risk managers and traders about hedging strategies and asset-liability management. Implementing hedges and reallocating portfolios often means reduced profits for banks; when this is the case, too many professionals prefer not to change things so that their bouses are not impacted.
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79 Testimony of
80 "Examining the Failures of
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Legislators and not-for-profit organizations are proposing different ways in which remuneration should be reformed. Clawing bank executives' bonuses when their banks fail should be explored.
The bi-partisan bill Failed Bank Executives Clawback Act correctly points out that "currently, the
Additionally, it is important to remember that Section 956 was not finalized. As explained by
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Require Transparency from Banks About Their Assets and Liabilities
Large banks should disclose the amount and concentrations of assets as well as liabilities at least once a month to the public, if not more frequently. We know they can do this, because there is a
Banks of the size of
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Utilize All of the
According to
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81 "
82
83 Review of the
84 Basel Capital Framework National Discretions.
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URL:
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(Continues with Part 2 of 2)
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Original text plus figures and charts here: https://docs.house.gov/meetings/BA/BA20/20230919/116342/HHRG-118-BA20-Wstate-RodrguezValladaresM-20230919.pdf
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