January 30, 2019

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 shockThe 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

Related Articles
News

IMF Releases Report on 2019 Article IV Consultation with United States

IMF published its staff report in the context of the 2019 Article IV consultation with the United States.

June 24, 2019 WebPage Regulatory News
News

BIS Report Discusses Regulatory Issues Related to Big Techs in Finance

BIS has pre-released a chapter of the BIS Annual Economic Report; this chapter focuses on the risks and opportunities presented by large technology firms in the financial services sector.

June 23, 2019 WebPage Regulatory News
News

IOSCO Report Examines Liquidity in Corporate Bond Markets

IOSCO published a report that examines the factors affecting liquidity, under stressed conditions, in the secondary corporate bond markets.

June 21, 2019 WebPage Regulatory News
News

FED Publishes Results of the 2019 Stress Tests for Banks

FED published a report presenting results of the Dodd-Frank Act Stress Test (DFAST) exercise for 2019.

June 21, 2019 WebPage Regulatory News
News

BCBS Report Examines Global Pillar 2 Supervisory Review Practices

BCBS published a report that examines the Pillar 2 supervisory review practices and approaches in Basel member jurisdictions.

June 21, 2019 WebPage Regulatory News
News

IASB Publishes Work Plan and Meeting Updates for June 2019

IASB published an updated work plan and a summary of its June meeting, which presents preliminary decisions of the Board.

June 21, 2019 WebPage Regulatory News
News

HKMA Publishes Banking Exposure Limits Code Under Banking Ordinance

HKMA issued a circular to all authorized institutions informing that the Banking (Exposure Limits) Code has been published in the Gazette on June 21, 2019.

June 21, 2019 WebPage Regulatory News
News

OSFI Proposes Guideline on Internal Model Oversight for Insurers

OSFI proposed the draft guideline E-25 on the internal model oversight framework for federally regulated property and casualty (P&C) insurance companies.

June 21, 2019 WebPage Regulatory News
News

EBA Single Rulebook Q&A: Third Update for June 2019

Under the Single Rulebook question and answer (Q&A) updates for this week, EBA published one answer regarding the calculation of institution-specific countercyclical capital buffer rates.

June 21, 2019 WebPage Regulatory News
News

SEC Finalizes Capital and Margin Requirements for Security-Based Swaps

SEC adopted a package of rules and rule amendments to establish capital, margin, and segregation requirements for security-based swaps, under Title VII of the Dodd-Frank Act.

June 21, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 3304