SIFMA Testimony at House Subcommittee Highlights Importance of Capital Markets, Need to Appropriately Balance New Capital Requirements

Washington, D.C., September 25, 2024 - In testimony today, SIFMA president and CEO Kenneth E. Bentsen, Jr. discussed bank capital requirements and the significant impact on the vibrancy of our capital markets and the strength of the broader economy.

The testimony was delivered before the U.S. House of Representatives Financial Services Committee Financial Institutions and Monetary Policy Subcommittee.

The testimony notes: "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. 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."

The testimony noted SIFMA's deep concern with the Basel III Endgame proposal as it was issued last year and highlighted key recommendations while policymakers prepare to issue a re-proposal of the rule:

1. Addressing the Overlaps with the Stress Tests/Other Capital Requirements:Any re-proposal of the Basel Endgame should account for overlaps with other prudential requirements, particularly overlaps with the stress testing framework, as well as the other pending capital proposals - i.e., the GSIB surcharge and long-term debt rules.
2. Accounting for the Interactions between the Global Market Shock (GMS) & the FRTB:Regulators should address the overcapitalization of market risk between these two frameworks by, for example, applying the FRTB to banks' trading portfolios on a post-GMS shock basis.
3. Diversification:The re-proposal should give greater credit for diversification under both the modeled and standardized FRTB approaches to better align with actual risk exposures and reward good risk management practices. It is crucial that greater diversification recognition be included in the final rule.
4. Internal Models: In the FRTB portion of the proposal, adjustments will need to be made to the capital requirements for modellable risk factors and non-modellable risk factors in addition to the P&L loss attribution test in order to facilitate greater use of internal models approaches.
5. Derivatives: We continue to believe client-facing leg of client-cleared derivatives transactions should be excluded altogether from scope of the CVA. Moreover, we believe that over-the-counter derivatives transactions with commercial end-users need to receive more favorable treatment in the final U.S. rule to bring that treatment into line with the approach adopted by the EU, UK, and other major jurisdictions. different levels of regulation that a bank's financial counterparties are subject to.
6. Securitizations: The Basel III Endgame proposal would create perverse risk incentives that would discourage large banks from engaging in important securitization activities; for example, it would increase the capital requirements for certain senior securitization exposures much more than relatively junior (and thus riskier) exposures. This should be revisited. Capital treatment for securitization exposures in other major jurisdictions is materially less punitive than the U.S. proposal.
7. Securities Financing Transactions (SFT) Haircut Framework:We welcome indications that the proposed SFT haircut framework will not be adopted in the U.S., given the significant adverse effects on the critical securities borrowing and lending markets that it would have. Removing this framework would also align the U.S. with the approach taken by other major jurisdictions.
8. Investment grade counterparties and collateral:We have also advocated for the removal of the so-called public listing requirement, which would penalize credit worthy counterparties that do not have publicly listed securities such as pension funds and municipal issuers. Vice Chair Barr's remarks suggest that this treatment will be revised in line with the approach taken by the EU and the UK, but we will need to review the text of the re-proposal itself. In addition, we would encourage the regulators to recognize the risk mitigation benefits of safe collateral to better reflect counterparty credit risks.
9. Operational Risk: We welcome the apparent decision to revise the operational risk framework to provide for the netting of income and expenses related to fee-based capital markets services. While we will need to review the details, this type of change would better incentivize sound risk management practices and diversified business models. This is particularly important to critical functions such as retail financial advisory services and investment banking. The agencies should address other issues in the framework that arise from the application of standards that are designed for top-tier entities to subsidiaries and unduly penalize the subsidiaries of foreign banking organizations (FBOs).
10. Implementation Timeline:Finally, the agencies should provide clarity around the Basel III implementation timeline in their re-proposal. We have called on the regulators to provide at least 18 months from completion of the final rule for firms to begin implementing the new framework.

The testimony also addressed additional important reforms to the stress testing process, GSIB Surcharge and Long-Term Debt Proposals as well as the FDIC's recent proposal to revise the regulations surrounding brokered deposits.

The full testimony can be found here: https://www.sifma.org/resources/submissions/testimony-on-financial-institutions-and-monetary-policy/

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SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry's one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).

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