In a letter to the FED Governors, the U.S. Senator Sherrod Brown, who is a member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, called on the FED to use its prudential authorities, including the countercyclical capital buffer (CCyB) for the biggest banks, to strengthen the resilience of the financial system and protect against the next economic downturn. Referring to the fact that the largest banks in the U.S. reported record profits to the tune of USD 100 billion, Senator Brown highlighted that the "systemic vulnerabilities are becoming more apparent."
He mentioned that now is the time to require additional capital buffers that large banks could draw on to mitigate a large adverse financial shock. The FED last considered the CCyB requirements in December 2017 and, at that time, voted to leave it at 0%. According to the FED, “circumstances in which the Board would most likely use the CCyB … would be to address circumstances when systemic vulnerabilities are somewhat above normal.” Under the policy statement, FED will consider a number of financial system vulnerabilities, including asset valuation pressures and risk appetite and leverage in the nonfinancial sector. These systemic vulnerabilities are becoming more apparent. The letter also mentioned that, recently, the former FED Chair Yellen urged FED "to carefully consider raising the CCyB at this time.” She noted elevated asset valuations in the real estate sector, the large volume of leveraged lending with a significant weakening of underwriting standards, and the high debt burdens of nonfinancial companies as threats to economic stability during the next downturn.
Senator Brown also cited the credit rating agency Moody’s Investor Service, stating that weak lending practices and increased lending to lower quality corporate borrowers “are creating credit risks that portend an extended and meaningful default cycle once the current expansion ends.” and that "Moody’s envisions more defaults than the last downturn and lower recoveries." According to Senator Brown, while capital quality and levels have increased since the crisis, capital levels are below the optimal amount needed to insulate American taxpayers from future bailouts. A comprehensive examination by FED economists found that current Basel capital surcharges for global systemically important banks (G-SIBs) are less than half the size than would be economically justified by an “expected impact” framework based on the economic effect of large bank failure. The same study also suggests that U.S. large bank surcharges currently set by FED, while larger than the Basel surcharges, are likely still considerably lower than the economically optimal level. "Instead of increasing capital, it appears the FED is heading in the wrong direction as it has started to take steps to reduce certain capital requirements."
Related Link: Press Release and Letter
Keywords: Americas, US, Banking, Systemic Risk, G-SIB, CCyB, Capital Buffer, FED, US Senate Committee
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
Previous ArticleOCC Proposes to Revise Company-Run Annual Stress Test Reporting Form
FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.
ECB published results of the quarterly lending survey conducted on 143 banks in the euro area.
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.
EBA published the annual report on asset encumbrance of banks in EU.
MAS revised the guidelines that address technology and cyber risks of financial institutions, in an environment of growing use of cloud technologies, application programming interfaces, and rapid software development.
FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.
EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.