(-)All right, we'll get started here.
I wanna be conscious of your time as well
and all the folks from ABA and BPI as well
taking time out of their day for this.
Thanks for joining us
for this joint ABA-BPI press conference.
And again, apologies for intruding on your lunch hour
and any sledding plans you may have had today here in D.C.
By now, you should have received our joint press release
with a link to our 137-page comment letter,
joint comment letter.
And we know that all of you will dutifully read
every word of that letter,
but just in case,
we wanted to host this virtual press conference
to make sure our experts can answer
any additional questions you may have
about the substance of that letter
and our significant concerns with the Basel III proposal.
We have several subject matter experts
from both ABA and BPI on the line
and we did lose a couple because of the weather,
but not too many,
so we have a good team here ready to answer your questions.
They will be ready to answer any specific questions
you may have,
but we did wanna kick things off by inviting
BPI President and CEO, Greg Baer
and ABA President and CEO, Rob Nichols
to make some opening remarks here.
We're gonna hear first from Greg and then Rob.
And so Greg, the floor is yours.
(-)Thanks, Peter.
Thanks to all of you for joining
and as Peter noted,
to the however many pages you read of the comment letter,
thank you.
And if you have questions going forward
because it gets awfully technical
you know, please don't hesitate to reach out.
We're, we'd love to talk about it.
Just as an overview, I mean,
I think the most important thing to understand
about the agency's proposal is
that it's at war with reality.
Large US banks tripled their capital levels
after the Global Financial Crisis
and by all evidence,
and I mean all evidence are amply capitalized,
they've weathered economic upturns and downturns,
COVID, Silicon Valley Bank, geopolitical unrest,
and by all accounts have shown that they have enough capital
not only to survive those problems
but to continue lending, supporting the economy.
Principals of the agencies,
same agencies that issued this proposal
both past and present,
have repeatedly stated that the US banking system is
well capitalized.
And when the bank, the Basel agreement was
announced in 2017,
its drafters actually noted that it would not result
in a capital increase
and they issued an analysis to show as much.
Those real-life results have been mirrored
in the annual reserve stress tests,
which ensures that banks have sufficient capital
to weather a storm even worse than
the Global Financial Crisis
and still remain well capitalized.
While it's based on a hypothetical scenario,
it actually looks at real balance sheets
and so is a lot more realistic
than a standardized approach set in Basel.
That fact receives no recognition in the proposal.
In the face of reality,
the agency's own statements and the Fed's results,
the proposal effectively finds that the US banking system is
significantly undercapitalized,
requiring an additional 16% of capital.
And that estimate is significantly understated.
Our analysis shows that the real number is
materially higher,
about 25% for the largest banks,
where whose diversification has made them
particularly resilient over those times.
And this is only US banks, by the way.
Some of you may have noticed
that the Bank of England recently finalized
its version of Basel
with a 3% increase in capital.
So how do you get to an outcome
that's so plainly at war with reality and reason?
You do so by overstating each of the four risks
covered by the proposal.
I would add as an aside that none of those four risks are
related to Silicon Valley Bank,
which was about interest rate risk
and deposit or concentration risk
and is being dealt with separately.
And you also have to ignore completely, as I noted,
the elephant in the capital room,
which is the existence of
a Federal Reserve stress capital charge that covers
many of the same risks.
For each of the four risks covered by the proposal,
credit, market,
operational and derivatives counterparty risk,
the proposal is generally based on no data or analysis
even when the agencies had
massive historical data at their disposal.
In our comment letter, which I hope you will read,
we do the work that the agencies failed to do.
We go through, we look at the data
and we estimate what an appropriate risk weight should be
and we show that the risk weights assigned by the proposal
are multitudes of what reality and experience would require
even in a worst case.
Just to give a couple of examples in the letter,
for credit cards, historical loss rates suggest
a risk weight of 73%,
so about $7 of capital against a $100 credit card loan.
The proposal would impose a risk weight of 140 to 190%
plus an additional charge
through the Fed's capital stress test.
For a small business loan
that a bank rates investment grade,
historical data shows that the appropriate risk weight is
about 30%.
The proposal would assign a 100% risk weight,
so more than three times higher than evidence suggests.
The capital charges for mortgages,
which I think have gotten a lot of attention,
are otherworldly and inexplicably higher
than even what Basel included.
They are actually significantly higher
than what would've been necessary to cover losses
from the worst cohort of loans
entering the Global Financial Crisis.
The charge for operational risk is extraordinary.
It's almost doubled
the worst year of operational losses in history,
even leaving aside a duplicative charge
in the Federal Reserve stress test.
And it assumes, counterfactually and counterintuitively,
that op risk losses are perfectly correlated
with market risk and credit risk losses
and therefore that you need to cover the worst case
of all three simultaneously and capitalize for it.
For securities trading,
the market risk component of the proposal
nearly doubles the capital charge.
Again, this ignores the requirements arising
from the Federal Reserve stress test
for the same purpose and covering largely the same risks.
No other country in the world will impose
both those measures,
and Basel of course took no notice of the Fed's
when it calibrated the standardized charge for market risk.
For the largest banks,
the overstatement of risk
in the Basel standardized approaches is
compounded by the elimination
of the advanced approaches to risk weighting,
that is using bank internal models.
That process has run successfully since 2014,
overseen by the same agencies issuing this proposal.
It's a more accurate look at risk
because it is granular,
looking asset by asset rather than lumping together
assets that have very different risk profiles.
Furthermore, importantly, those models can be back tested
and updated to take account of events
and thereby improved.
That's not something that can happen
with a government set standardized model.
Most remarkably, though,
the continued use of internal models was
actually the hallmark of the 2017 Basel agreement
that the agency staff negotiated
and they will be retained in every other country
in the world.
The inexplicable and arbitrary elimination of this regime
of course makes the standardized capital charges binding
in all cases
and further distances the outcome from reality and reason.
All of this matters.
It has a direct effect on the availability
and cost of credit for American consumers and businesses.
It has a direct effect on the vibrancy
of our capital markets
where existing regulation is already reducing
the role of market making.
Risk will continue to flow,
as it has been well documented,
to unregulated firms which have less ability
to take on that risk in economic downturn and during crisis.
And ultimately, the government may assume
some more of that risk
and take on roles that were traditionally played by banks.
So it's a bad premise,
it's a bad conclusion
and that's why we have devoted so much time
to pointing its flaw,
pointing, not only pointing out its flaws
but in the letter filed today,
trying to chart a better course.
So with that, lemme turn it over to Rob,
got some stuff on his mind too, I think.
(-)Sure do.
Thanks, Greg, and good afternoon everyone.
Thanks for being here.
I'm happy to take a couple minutes to offer
our perspective on this
and let me first start by expressing our appreciation
to the BPI team for their partnership
on this joint comment letter.
It's a super sharp team, you're great partners,
wonderful colleagues, so thank you so much.
As Greg noted, we hope you leave this press conference
with a better understanding of our significant concerns
with the Basel III proposal
and some of the specific points we raised
in our joint comment letter that we filed earlier today
that Greg just mentioned.
I think the overall top line message in our comment letter
should be crystal clear.
This proposal, if enacted, would usher in
the most radical transformation of bank regulation
in the last decade.
By our estimate, the nation's largest banks,
the vast majority of which are considered
well capitalized today,
and which represent more than 80% of total bank assets
in the United States,
would be forced to increase their capital by over 20%,
with many banks forced to increase capital by over 25%.
And to put it as plainly as I can,
our position is that this proposal's unworkable
in its current form and needs to be withdrawn.
That's a point Governor Waller made a short while ago today,
and frankly many other regulators have noted
in the days and weeks previously.
Lemme offer briefly three key reasons why we feel that way.
One, regulators failed to conduct
a thorough and transparent data analysis needed to justify
a proposal of this scope and scale.
Second, the rule as proposed would restrict
funding availability in several key parts of the economy
at the same time that policymakers are working
to avoid a recession.
And third, despite being targeted
at the nation's largest banks,
the proposal will inevitably threaten banks of all sizes'
ability to serve their customers, clients and communities,
particularly the community banks that make up
the majority of our member base and the US banking system.
So let's start with our concerns regarding the agency's
seriously insufficient data analysis.
Regulators have demonstrably failed to conduct
a robust analysis of the costs and benefits
of this proposal,
not just for banks but for the overall economy as a whole.
We fundamentally disagree
based on the text of this proposed rule
that regulators understand the full extent
to which these changes would constrain lending.
We also take issue with the fact
that the data underlying regulators' assumptions was
not shared publicly.
That's a major misstep and a failure to follow
the legally required notice and comment procedures.
Now just last week, regulators said
that they intended to collect data
and make their analysis open to public comment.
Certainly it's a welcome step and it's a kind of an,
but it's the kind of analysis that should have happened
before issuing any such proposal.
We've also had serious concerns about the impact
on specific sectors of the economy and consumers
if this proposal were to be finalized.
The proposed increases in risk rates for mortgages
with higher loan to value ratios will
disproportionately affect low and moderate income borrowers
and first-time home buyers.
A wide range of housing advocacy groups
of very diverse ideologies shares our concern in this area.
Higher proposed risk weights for businesses
that are not publicly traded will put
privately held customers,
that's your small and medium-sized, private,
family-owned local businesses
in many cases at an unreasonable disadvantage
to publicly-traded companies when seeking credit.
Renewable energy projects will be harder to finance
at a time when the administration is
looking to expand investment in alternative energy sources.
We also anticipate that capital projects will be affected
by higher capital requirements,
as will derivatives and other hedging instruments
that businesses like airlines, farmers and agribusinesses
use to manage risks daily.
That's why you're seeing so many ag groups opposed to this.
(-)[Jennifer Schonberger]capital increases, pardon me,
in this proposal come at a cost.
And that cost will not just be borne,
not just be borne by banks
but by the consumers that of course banks serve.
For example, banks with higher levels of fee income
could see particularly large increases
in capital requirements
due to the new operational risk charges.
(-)[Jennifer Schonberger]cost more and products and services will be less available.
This proposal would limit the support banks can provide
the US economy,
causing a significant reduction in GDP and employment.
And that pain could well be felt
before the capital requirements kick in
because banks will need to start adjusting
their balance sheets sooner
in order to be in compliance over time.
It would make the capital markets less liquid
and drive businesses, as Greg noted,
out of the regulated banking sector.
So regulators also say these changes are being driven
by an international agreement
,
yet their foreign counterparts in other countries have
chosen not to impose these higher capital requirements
on their banks,
putting US institutions at a competitive disadvantage.
These are outcomes no one should want
and we can avoid them if regulators rethink this proposal.
So we know that the past 10 years
of implementing Dodd-Frank
that changes to the banking rules intended
for only the largest institutions end up cascading down
on smaller institutions.
We've seen that again and again and again.
That's the nature of our dynamic,
interconnected banking system
where some large institutions provide services
to smaller banks,
and it's incredibly shortsighted of regulators to assume
that cranking up capital requirements
for our nation's largest banks won't have
downstream consequences.
The fact is the proposal is another step in that direction
of one size fits all regulation
and a giant step away from the tailored,
bipartisan regulatory framework that Congress envisioned
when it passed 2155 in 2018.
It's not just my opinion,
it's something that Governor Miki Bowman herself said
just a week or so ago.
So in conclusion, wanna make clear
that we agree with regulators
on the importance of robust capital requirements for banks.
They are important to promoting
a safe and resilient banking system,
but requiring banks to hold too much capital comes
at a cost to consumers in the economy,
and that's what this proposal does.
Regulators have stated repeatedly
over the past several years
that the banking sector's already strong
and well capitalized.
In fact, many regulators made that point crystal clear
just a few weeks before unveiling this proposal.
Banks survived the unprecedented economic challenges
posed by COVID-19
and played a critical role in helping the US emerge
from that downturn faster and stronger
than the rest of the world.
They've continued to navigate
a period of geopolitical stress,
heightened uncertainty and rising interest rates.
And last year, they weathered an acute stress test event
with the idiosyncratic SVB signature failures,
demonstrating the strength and resiliency
of the banking system.
And by the way, the banks that failed in the spring of '23,
they failed for reasons
that had absolutely nothing to do with capital.
So the bottom line,
we don't see the justification
for these kinds of capital increases,
and given that regulators have failed to provide
the data needed to support the conclusions,
we believe the proposal should be withdrawn.
And I remain hopeful that regulators will carefully consider
the joint comment letter we submitted today
and recognize it's not too late to rethink their approach.
With that, I'll send it, Peter, back to you
with questions.
(-)Great, thank you Rob, thank you, Greg.
And I do wanna open it up to questions from the group.
We have both Rob and Greg ready to answer your questions.
We also have a number of, as I mentioned at the top,
some subject matter experts from both ABA and BPI
prepared to weigh in on specific topics as needed.
I'll call on them or bring them in as needed.
And in terms of questions,
if you see the Reaction
tab down at the bottom of your screen,
should have a chance to raise your hand.
So, please use that feature if you do have a question.
We'll try and make that work.
It doesn't always work for people
and please try and limit your questions
so we can get to as many people as possible
in the time that we have.
And with that, I'll go to our first question,
Claire Williams.
And if you could,
if you could just tell us your outlet as well,
just so everyone on screen knows who you are.
Claire, welcome, and you get the first question.
(-)Awesome, thank you guys.
I'm Claire Williams, I'm with "American Banker".
I wanted to ask,
I skimmed over most of your comment letter so far,
but it seems to me,
and with the comments that came with it there,
I guess does it seem to you all like there is an avenue
for the Fed to,
and bank regulators to revise their proposal
in a way that would eliminate these problems
that you're seeing?
Or are we really talking they need to withdraw
and re-propose and begin this process all over?
(-)Greg, why don't you go first
and then Rob you can weigh in afterwards.
(-)Yeah, I mean to some extent it's a substantive
and then to some extent a legal question.
I mean, I, you know, our belief,
and I think we document pretty well, is
they need to make substantial changes to the proposal,
certainly around op risk,
we hope around credit risk and internal models
where you would actually need to import the output floor
that was in Basel.
Some of the risk weights, you could just adjust.
Again, they don't really take any account
of the overlap between the Basel proposal
and the stress test.
So I think in, just in a lot of cases,
it's hard to imagine them being able to make
the kinds of changes that need to be made
without having to re-propose it,
not only to give us a chance to comment,
but I mean, you know, other people read our comment letter,
but you know, they didn't know that was coming
and so they may want a chance to comment
before the agencies make substantial changes.
So I just think it's a practical matter.
It's hard to imagine the kinds of changes that we're seeking
and which merit inclusion
without giving the public another chance to look at it.
(-)Thank you.
(-)Rob, you wanna add anything to that?
(-)No, he covered it.
(-)I just add one thing to that too,
and I think part of the public
that we haven't really talked about,
obviously you're talking to two bank representatives today,
what's really been different about this proposal is
that the end users of bank products
have been extremely active.
They recognize that the costs are going to be paid
ultimately by them,
whether that's consumers, businesses,
market participants or the people who represent them.
So really in a way I can't ever remember
you actually have of vocal constituency of bank end users
stepping forward to say,
"No, we understand this is going to
not just cost banks more,
this is going to cost us more,
whether we're trying to get a business loan,
whether we're trying to get a consumer loan,
whether we're trying to trade securities
or issue securities."
And I think that's a group that's gonna be heard from
I suspect in the comment period,
but I think maybe want to be heard from again.
(-)All right, thanks Greg.
Next question, Pete Schroeder from "Reuters", Pete.
(Pete Schroeder)Hey guys, thanks for doing the call.
I've got a similar kind of just process question.
I just want to pin this down.
I mean, we talk a lot about you all saying
that the rule needs to be withdrawn
and talking about a re-proposal.
Do you all actually want to see a re-proposal,
or is it perfectly fine for this just to be withdrawn
and that to be the end of it?
Do you think that there's any rule writing around Basel
that actually needs to be completed?
(-)Oh no, I mean, I,
again, as I said, I mean
I think the reason we think it needs to be re-proposed is
just because you wanna make a substantial amount of changes.
But I, you know, nobody's here a Basel denier.
I mean, there are virtues to having
you know, somewhat common sets of rules
across jurisdictions.
No one thinks that, you know, Basel is a bad enterprise.
In fact, our largest problems with this proposal are
actually the deviations from Basel.
It's getting rid of internal models that Basel retained.
It's not taking account of the stress test
where instead of changing Basel,
you could change the stress test.
It's the securities listing requirement
that discriminates against small businesses
that both the UK and the EU have decided to drop.
So, you know, the fault here is not necessarily in Basel,
but in how the agencies have interpreted it.
(-)All right, Rob, if you don't wanna weigh in on that,
we can go to the next one, Elisabeth.
(-)[Elisabeth Buchwald]I know you guys are in the midst of kind of exploring
potentially suing the Federal Reserve,
and I wonder if you see that
sort of as a last line of defense
or if that's something you see as necessary
at this stage in the game?
(-)Rob, you wanna go first, then let Greg weigh in?
(-)Yeah, I'm sure that Greg can give you,
thanks, Elisabeth, for the question.
I mean, I think we have solid grounds
for challenging this in court,
but that very much is a last resort.
And so we'll wait to see what the final document looks like
before making that judgment.
Again, it's the last resort
and it's our hope that the regulators here
from not just our group and BPI
but to Greg's point, all of the end users
of the banking system
who I think have made very compelling points
around the concerns of this proposal.
(-)Yeah, I mean I'd just say
traditionally the, it's not just the Federal Reserve,
all the agencies, but particularly the Federal Reserve have
been data driven and analytical.
That's why our biggest problem with the proposal is
there's a lack of data
but again, we've supplied it and, you know,
call us naive or Pollyanna-ish,
but we genuinely believe
when they look at the numbers and the data
that they will want to make significant changes.
I mean, they want a vibrant banking system,
they want a vibrant economy.
And looking at what we've presented,
it's hard to see how you read all that and say,
"No, we're gonna stick with what we had."
(-)All right, thanks Greg, Emily Flitter.
(Emily Flitter)Hi, good afternoon everyone.
Thank you so much for doing this.
I'm trying to make sense of the different voices out there,
and obviously there are some, you know,
like Better Markets who
are saying that the banks are really upset
that the capital requirements will inhibit
their ability to distribute cash to shareholders
through buybacks and dividends.
And I just wanted to present that to you
and get your reaction.
(-)Well, I mean I think as a lot of CEOs and CFOs have
made clear on earnings calls,
share buybacks is their last choice, right?
I mean ideally if you're a business, including a bank,
if you have profits, what you want to do is
reinvest those in the business and grow.
And you know, the problem here is
that the cost of capital for a lot of businesses
that they used to invest in and grow
is not so attractive,
and that the shareholders would prefer
to have their money back
than have them invest in something that is
not actually gonna earn a competitive return on equity.
You know, when you look at ROEs for the banking industry,
when you look at the value of their stock
versus tangible book,
it is not a pretty picture with regard to other industries.
So, you know, I think the fact
that they're buying back the stock is
more of a warning sign than a sign that, you know,
we need to have higher capital requirements.
(Emily Flitter)That's fair,
and also on specifically on the mortgage component,
there seems to be
the biggest problem with the way that this rule would treat
mortgages with a loan to value ratio of above 90%.
Am I wrong about that?
(-)Well, I mean Emily,
I think we would say,
I mean that's certainly attracted a lot of attention,
but I don't, I can't say that that's
any more over-calibrated than anything else.
I mean, basically they took the Basel numbers
and added 20 basis points to every LTV, you know?
And, you know, while that's obviously a sympathetic group,
the point is that it's just wrong.
I mean, in terms of the amount of risk that they present.
If it were right, well then as a bank regulator
that's what you should be imposing.
But again, I think it's up and down all the LTVs
as far as our data show.
(Emily Flitter)So do you.
Happy New Year and appreciate your thoughtful question.
I wanted to build on something
that was one of the building blocks of your question
around the diverse groups weighing on this.
(Jessica Holzer)I just wanted know.
(-)I think that the housing side,
you have a lot of left of center where I would,
what I would categorize to speak for myself,
left of center housing groups that have come out
and raised their hand and expressed serious concerns
over the mortgage proposal.
You mentioned Better Markets, that's one group,
but there've been ag groups, the housing groups,
all these end user groups.
I don't, I think in my experience
in representing and serving the banking sector,
I've never seen so many disparate groups
across the ideological spectrum
raise their hand with concerns over a rule proposal ever.
I just don't think I've ever seen,
in my experience of representing banks,
so many groups and particularly so many
that you would not say are aligned with banks
in any way, shape or form,
raise their hand and say, "This is wrong,
this is gonna screw up the economy,
this is gonna screw up,
this is gonna get in the way of our ability
to provide a really important function
for customers and clients."
So I just think that's really notable,
how many folks that are just not natural bank allies have
raised their hand here.
So, sorry to interrupt you.
(Emily Flitter)Well, they're kind of taking
your word for it, right?
I mean, they're not,
it's not like each group did their independent analysis
and came up with the same thing.
They're all basing it on the same set of premises
and the Urban Institute paper,
right?
(-)Yeah, no, I was just gonna,
funny you said, yeah, I was just gonna say
the Urban Institute didn't rely on our analysis.
We actually used a different data set
from the Urban Institute
and reached basically the same conclusion.
But you know, that was independent work.
I mean again, and we, you know,
in this comment letter we show our work, right?
I mean, a lot of the data comes off, you know,
the regulatory filings, the call reports.
A lot of the data's quite public, you know?
Groups who are critical,
we invite them to take a look at that data
and try to show a different result.
You see also, you know, there's an expert has filed
a separate comment letter here
you know, demonstrating the economic issues
or I mean, sorry,
the flaws from an economist's perspective.
So again, I mean, a lot of the data's public,
and so we know, we hope others will grind that data
rather than just, you know, make accusations.
(-)Let me ask you.
(-)Emily, just make sure any of their subject matter experts,
if they wanna weigh in as well,
this is an area obviously of significant analysis
and research from folks on screen.
And Hugh, Hugh Carney from ABA and Francisco,
Hugh, you got something you wanna add here?
(-)Yeah, I did just want to emphasize
that the risk rates on mortgages are gonna go
from 50%, which is applied generally today,
to as high as 90%,
and that these risk weights are higher
than what are currently applied,
higher than what is justified by historic data
and higher than what is in the Basel agreement.
And so I don't think it took a lot of research to realize
there would be significant impacts on the mortgage markets,
particularly for those Americans
that are low to moderate income
or first-time home buyers where that loan to value is low.
So, Francisco, or is high, apologies.
(-)No, absolutely.
So no, just to add to Emily's comment,
so we published several research notes
about the different, you know,
our counter proposals in the Basel III proposal.
We had numerous discussions with the various groups
about our assumptions and explaining,
and all the notes that we have published are public
and so they can be in,
we try to be as transparent as possible
in terms of the assumptions.
So we had, just Emily,
so we had significant discussions with the various groups
and all of those that cited our research notes or letter.
(Emily Flitter)Thank you, this is really helpful.
Can I ask one more question?
(-)Emily, can I get somebody else on?
(Emily Flitter)Oh sure, sure, sure.
(-)Get back to you,
just wanna make sure we get to everyone.
(Emily Flitter)Sure thing, sorry.
(-)Brendan Pedersen.
(-)[Brendan Pedersen]Good to see you all.
We've talked a lot about the sort of regulatory options
on the table and the sort of court, sue-y options,
but I wanted to ask about Congress.
As you guys are thinking about advocacy going forward,
is there a role for Congress here?
Are you, do you have any plans in the works
when it comes to either the members who you know are
sympathetic to your position
or the members who might be on the fence
or just haven't spoken about this issue all that much?
Thanks.
(-)Rob, you wanna go?
(-)I, yeah, Brandon, thanks.
Happy New Year to you as well.
I, listen, I've lost track
of the number of letters from Congress that have gone
to the regulatory stakeholders expressing concerns here.
So I'll let Congress and the individual members
speak for themselves
but I will say we've just seen a slew of letters
again, from across the ideological spectrum on Capitol Hill
raising their concern.
So I would put to you to call and to see
if they wanted to initiate, you know,
legislative action here.
But I would just say that's been another,
we've just seen a chorus of voices
from across both parties on the Hill
that have made points consistent with
a number of the ones that we put
in the joint comment letter today.
(-)Greg, you wanna add to that or?
(-)No, I would just, that was perfect.
I would just add, I mean,
it's actually been quite encouraging.
I mean, obviously bank regulation in general
and bank capital regulation in particular is
a fairly arcane exercise.
But you know, in meeting with members and staff,
they have internalized these rules.
They actually, they understand what we're talking about.
They understand the impact on their constituents,
not just their bank constituents
but their business and consumer constituents.
So I don't think these are just, you know,
going through the motions kind of comment letters,
these are substantive letters getting at real problems
with the proposal.
(-)Great, thanks, Victoria Guida.
(Victoria Guida)Hey guys, thanks for doing this.
You know, it's possible that there's more detail
in the comment letter.
I haven't gone through the entire thing
but I just wanted to ask on operational risk,
you all talk about wanting
to sort of lower the calibration and also redo it.
And I know there's been a lot of talk about how
you know, the operational risk approach
doesn't necessarily make sense.
And I was just wondering,
do you all have an idea
of an operational risk capital approach
that would make sense?
I mean, it seems like a lot of the,
a lot of the talk is just kind of like
well, why have it at all?
But like, is there an approach
to operational risk capital
that you all think would make more sense
than the approach they're currently taking?
(-)I was gonna go, but I just saw Francisco uncloak,
so, and I know he's ready to go.
(-)Yeah, hi, thank you Victoria.
So yeah, so I mean there's two elements
over at the big picture level.
You know, we want, we do think that there's
a significant overcapitalization for operational risk.
We made that point very clear in the letter
by comparing how much operational risk capital is
in the proposal, in the stress test,
and comparing against the worst year
of operational risk losses.
So that's point number one.
So we do, and we have
different suggestions to reach there
to accomplish that goal.
You know, one possibility would be, you know,
setting this so-called internal loss, you know,
definitely remove the floor of one
on internal loss multiplier.
And if it's, if the agency decide to go
to have a floating internal loss multiplier,
to significantly recalibrate the formula
and lower that multiplier.
If they were to set internal loss multiplier equal to one,
then it requires other changes.
In particular, we know we are asking for significant changes
in the stress test,
the way operational risk losses are calibrated
in the stress test.
In term, the second problem
with the operation risk framework is
overcapitalization for operational risk,
specifically for the high fee income banks.
And in the letter, we give a range of options
without going through all the options.
And I would say just a simple haircut to fee income,
that's the, that's one solution that we are pushing
among others, but there are different solutions.
But one simple one would just be
to reduce
fee income
in the way the operational risk charge is calculated.
(Victoria Guida)Oh, just to make sure I understand
what you're talking about,
when you were talking about getting rid of the floor,
that's basically like
allowing for some banks to have
less operational risk than others
and getting a benefit from that, from trying to.
(-)So it's two things.
So, removing the floor and recalibrating
and changing and adjusting downwards
that coefficient that varies
with your past operational risk losses.
So it's combined, it's not just removing the floor.
The removing the floor does not address
the overall overcapitalization for operational risk.
(-)Yeah I mean, put simply,
and I think you had it, Victoria,
I mean, what the proposal says is
if you have higher than normal operational risk,
I mean operational risk losses in the past,
we will increase your charge.
But if you have lower than normal operational risk losses
in the past,
we will not decrease your charge.
Which sort of seems kind of per se arbitrary.
But I do wanna just flag something
that Francisco mentioned briefly,
which is, I mean, this is a classic area
where the data exists and were not included in the proposal.
There's an organization,
and you'll see this talked about a lot
in our comment letters, called ORX,
which is basically a data repository
for operational risk losses.
They have that historically.
The agencies did not consider it.
We did.
And what we show is even if you look at
the worst operational risk losses ever,
worst cohort ever,
they're calibrating this probably close to double
what that was.
Furthermore, two important things,
that does not include a separate duplicative charge
for operational risk in the Fed stress test.
And second, and with a little more subtlety,
but this is a point I think Governor Waller made
early and quite cogently,
it presumes perfect correlation.
So it, what they're effectively saying is
here's your worst case credit losses,
here's your worst case market losses,
here's your worst case operational risk losses,
and they're all going to occur at the same time.
And we have terrific data to show
that in fact they are not perfectly correlated.
In fact, they are correlated very little.
If you think about an op risk, you know, event being
a cyber attack or even a fine for anti-money laundering
or some consumer event,
that doesn't correlate with market turmoil.
The only time it kind of correlated was
the Global Financial Crisis where you had, you know,
obviously huge mortgage losses but then ensuing litigation.
But even then, what the history shows
and our documentation shows is
those losses weren't incurred by the banks until 2010
and then a large cohort in 2014.
So even though the sort of event date was the same,
it's not when the losses were recognized.
So a dollar of capital held for credit or market risk can be
used to hold,
can be used to offset a operational risk loss.
And interestingly, that's what the current proposal,
I mean, what the current law is.
The US does not currently have
a separate standardized charge for op risk
because they said at the time,
oh no, we've calculated or calibrated
credit and market risk to cover operational risk as well.
So this is a major break with that.
And to add it, 100% on top,
assuming perfect correlation when the evidence is
that there's almost no correlation is
a really big problem.
(Victoria Guida)Not to.
wanna chime in as well on that?
All right, sorry Victoria, you had a follow up.
(Victoria Guida)I was just gonna say,
and not to labor this point,
but I would think that,
wouldn't a cyber risk event potentially have,
like a, would that be an example of something that,
where those things might be correlated
and something where there might not be
a historical precedent for it?
(-)I would say a cyber event, you know,
call it a, whether it's a denial of service attack
or a takeover, whatever,
that's not correlated with a deep recession.
You know, it's not correlated with
you know, repo market volatility.
And also, I mean, when it comes to cyber,
I mean all of this is a little bit of make-believe
in the world of operational risk,
you know, banks really haven't suffered
large losses from operational risk.
The big risk is actually denial of service
and things like that.
You know, when you look at the numbers
that are driving operational risk calibration,
it's not cyber events.
It's basically settling, you know,
civil litigation and paying fines to the same agencies
that are imposing a capital requirement for it.
(Victoria Guida)It's based on historical data, right?
(Greg Baer)Yeah.
(Victoria Guida)Yeah, yeah, okay, thanks.
(-)All right, let me move on.
Janice Kirkel and Janice,
remind us where you're from please.
(Janice Kirkel)Yes, Janice Kirkel from risk.net.
In listening to all of this,
what strikes me is just the gulf between all of you,
the banking industry,
and regulators seems so wide that
I mean, I'm not asking you to read other people's minds,
but it's enough to make you ask
well, what could regulators possibly have been thinking
in arriving at some, you know,
according to your side of things,
what could they possibly have been thinking
in arriving at some of the figures,
the statistics, the correlations that they made,
which, you know, you all, you know, say don't exist?
It just seems so extreme that it begs a question here.
(Rob Nichols)I mean, I'll.
(-)Go ahead, Greg,
I wanna respond to her question too, but go ahead.
(Peter Cook)Greg, go ahead.
(-)You know, I don't, I can't read people's minds
but I mean, I think one way to look at this is
effectively what this proposal is
is taking the 2017 Basel risk weights as a given,
adding to them in certain areas fairly arbitrarily
and then really failing to recognize
US-only components of that.
Certainly that's the stress capital charge for op risk,
the stress capital charge for market risk.
You know, the securities listing requirements,
it's hard to understand given that
that's in the Basel accord but the other agents
or the other governments have not, in fact,
you know, imposed that.
So really it's you take Basel as gospel,
although that was never a treaty,
and then you add to it and fail to acknowledge
where there are overlaps in the US.
I think that explains a lot of the problem.
Again, the one that I just really don't understand is
eliminating internal models in the advanced approaches,
which the whole point of the 27 accord,
2017 accord was to retain.
So that one's really a puzzler,
but I think you can generalize about the rest.
But Rob, your perspective.
(-)No, I just, first of all, Janice, thanks for your question
and I certainly can't speak for the regulators
that think this proposal is sensible.
I would observe, though, that there are regulators
at the Fed and at the FDIC
who have been sharply critical of this proposal
and think it's very misguided and should be withdrawn.
So my observation being simply
that the regulatory community's pretty split on this
and there are some that think it's sensible
and then there's a large chorus
that does not share that view.
(Peter Cook)Hugh Carney, you wanna add anything to that?
(-)Sure, just to build on Rob's remarks there,
this did get through,
was approved by a Fed board that was split
and an FDIC board that was split,
and that even many of the folks on the Fed
that did vote for it raised concerns with the proposal.
One of the things that we would like to see as
ideally if this is withdrawn is
that when they start building a re-proposal,
if they find it necessary,
they build it building consensus on the Fed board
so that those concerns are raised
or help form the proposal
rather than necessarily being an objection
out of the Fed board itself during the vote.
(Janice Kirkel)Right, if I could just ask
one quick follow-up 'cause there has been
so much controversy about the internal models
and so much talk about that,
what was it, simply a reluctance
on the part of regulators to have, you know,
vastly, possibly vastly different processes
at different banks in making these models,
different levels of competence, you know,
varying amounts of resources devoted to this,
that kind of thing?
Is that what is giving regulators pause
about the internal models?
(-)I mean, I think that's basically a fair summary,
what they would refer to it as
unwarranted volatility or variability.
I mean, but I think if,
when you look at what's actually going on,
I mean this has been going since 2014 in the United States.
The agencies have incredibly detailed guidance
about how the process runs.
The banks have multiple lines of defense to ensure
the outcomes are right, you know,
compliance audit,
the models have to be backtested
and shown that they're not producing spurious outcomes.
And then it's also kind of notable
that while they're proposing to get rid of these
for credit risk,
actually they use bank internal models
as the entry point for the Fed stress test
and they use bank internal models for market risk.
So it's sort of odd that only here
do they believe that there's somehow going to be
unwarranted volatility,
and because we just don't see it.
And of course it's easy also to say, and true,
you know, in nine years since this process has begun,
we're not aware of any enforcement action against a bank
for understating its risk in a systemic way,
any qualms by any agency principals
that oh, this process isn't working.
Really, this sort of came out of the blue.
My colleagues are
.
(Janice Kirkel)Okay, thank you.
(-)Yeah, thanks Greg, appreciate it.
Thank you, Janice.
Andrew Ackerman.
(Andrew Ackerman)Hey, thanks so much for doing the call.
I just,
I guess I was trying to be a little bit more precise
in sort of the economic
estimates that you guys did.
So the Fed says that
the proposal would on average raise
bank capital by 16%.
Is there an analogous figure for, you know,
all of the 37 or so banks we're talking about
in this bucket above 100 billion?
(-)I'm gonna turn to an economist.
Francisco, do you wanna walk through what we did?
I mean we did our own QIS and
working with others, but go ahead.
(-)All right, so the number we cite in executive summary is
just for the G-SIB category I banks only.
So that's 25% in terms of capital requirements,
risk weighted assets about 33%.
We don't have,
you know, we don't have the results for the entire sample.
So, meaning the other remaining 29 banks,
we only have a sub-sample at the QIS
and therefore we did not report the data
from all the other, the remaining banks.
But generally speaking, we do,
we see a similar threat,
slightly similar trend in a sense that
the capital requirements, the proposal,
the effect of the proposal on risk weighted assets
is slightly higher than was indicated
in the July proposal.
But we don't have the overall number for you.
(Andrew Ackerman)I'm sorry, just, so you're saying
the 16 average increase,
16% average increase you think is a little low,
but you don't have an analogous figure,
an average figure for all of the banks, just for the G-SIBs.
(-)Correct, Andrew.
(Andrew Ackerman)Okay, a little I guess
that comes back to the fundamental, I guess,
I'm sorry, I should probably shut up,
but if you're, I'm trying to,
I'm trying to,
like that seems,
I'm trying to connect that
with the overall point you're making,
which is that this is a huge increase in capital.
If it's a little bit higher than 16%, I don't know,
that sounds pretty modest to me on.
(-)Well, 16% is a huge increase in capital.
I mean, that implies that the industry is
significantly undercapitalized against.
(-)Right, and Andrew, as we see in executive summary,
there's a significant amount of heterogeneity.
You know, obviously the largest banks are
heavily affected both by the operational risk charge
and market risk and CVA.
Also below the G-SIBs, it depends significantly
on your business model,
meaning if you have a business model
that's mostly focused on fee income,
the increase in risk rated assets can be well in excess
of 20, 25, 30%
just because of the operational risk charge.
So there's also significant amount of heterogeneity
but as I said, we don't have the entire,
the other remaining 29 banks to be
certain what the number is.
But I would, you know, if I have the number is
probably close to a little bit around 20%
or a little bit higher.
(-).
(-)Francisco, correct me if I'm wrong here,
but that was focused on the Basel proposal,
not the G-SIB surcharge,
which adds another roughly 5% for those largest banks.
(-)That's correct, yeah.
(-)Anyone else on the ABA side wanna weigh in on this
or add to this?
(-)I, just one general observation,
it applies to Andrew's question but just generally I,
and I made it, but I wanted to reinforce it.
I mean, remember, let's take,
take us back to the summer of '23
when the stress test came out
and then the banks passed with "flying colors"
and they said they're well capitalized.
And then just a couple of weeks later,
this proposal came out.
I can't square that circle,
where the banks are well capitalized
and then just a few weeks later are
woefully undercapitalized.
I, that just, I don't, I can't square that circle, sorry.
(Andrew Ackerman)Yeah, no, I mean I take your point
that they, there's a bit of a U-turn there.
I just, I guess it would be helpful to have,
if we're gonna report, you know,
the banks think that 16% figure is wrong,
it would just, it would be helpful to have
a precise estimate that you,
after, you know, six months or so of looking at this
that you guys have.
But you're saying you don't have that,
you only have a figure for the G-SIBs.
(-)Right, well, I mean that's, yeah, right.
But that's a data limitation that we have.
I mean, again, this is why
we would've liked the agencies to do that work,
so, or, and show their work so we could
you know, review that.
(-)But we'll assemble,
there's a lot of data out there.
We'll, we're the team's happy to assemble
everything we have our fingers on
and we'll share it with everybody.
(-)I don't see any other hands raised,
but I did promise Emily that I'd come back to her
if she still has another question.
(Emily Flitter)Thank you, thank you so much, Peter.
I remember when Volcker was being hammered out,
the, or the, let me start this again.
The focus on what this proposal will do
to constituents,
end users of banks
like farmers, airline industry participants,
it's all reminding me of the messaging
around Volcker from the banks.
This is going to
prevent banks
from helping really fundamental industries in the US
hedge their risk.
Given that this
same messaging was
projected back then for Volker,
can you point to
an effect that Volker had
that actually brought that prediction last time into reality
and, you know, and to help us understand
like how it's going to work this time?
I hope I phrased that okay.
I'm not sure if I'm being precise enough.
This just reminds me of what I heard back in 2012
and it didn't quite seem to come true back then.
How is this different?
(-)Well, I mean it,
cause and effect here is a little different,
is a little difficult
because a lot of Volcker was intangible.
It's if you're telling a market maker,
if you hold the inventory too long,
you're now a prop trader,
but you may wanna hold that inventory
because you're making a market in an illiquid security,
that has sort of a psychological effect
which is very hard to quantify.
We do know, though, that the agencies actually revisited
the Volcker rule,
one sign that maybe there's something was wrong.
And we also know, and you know,
this could be causation or correlation,
but we've continued to see, you know,
a lack of market depth.
Banks, well first, fewer and fewer banks
being principle at risk market makers,
more of that going to the shadows
and, you know, less market depth against an increased,
you know, volume of bond issuance.
So I think the Volcker effect,
and I remember talking to people at the time,
it was very hard to quantify.
It's basically what's in a trader's head.
Are they worried that they're gonna get
called on the carpet
either by their compliance department or some examiner
and say, "You know what?
Wait, you held that inventory too long."
I think here it's probably a little easier.
Well, not easy,
it's a little more objective and quantifiable
when you look at how much the assumptions around the FRTB,
that is the market risk component,
you know, how draconian they are in some cases,
particularly around sort of the liquidity assumptions.
But then the biggest issue here actually is
that this is really doing the same work
as the global market shock in the Fed stress test.
That's not difficult to understand.
I mean, we've obviously published some great research.
My colleague, Greg Hopper,
talking about how they both cover
effectively the same five risks.
And if you think about the history of market risk,
you know, you had Basel 2.5,
which was basically a value at risk methodology
where you want, need to hold enough capital
to cover yourself 99 point something percent of the time.
And then the other, you know, 1.1%,
you don't worry so much about.
I think after the Global Financial Crisis
there was a recognition that that's not right.
You actually need to cover the tail, not the dog.
And so you need to hold capital against, you know,
the most extreme possible outcomes.
Well, there were two ways to do that.
The Fed said, "Okay, we've got that,
we're gonna do that right away."
We're gonna have a global market shock
and we're gonna assume a replay of global,
of the Global Financial Crisis market activity
and then some,
and we're gonna require banks to hold capital against that.
The rest of the world didn't do that.
They went to Basel and said, "You know what?
We're gonna come up with a standardized charge
that is more focused on the tail risk
than it is on the norm."
In effect, we're gonna have
a standardized stress capital charge for market risk.
And so they went off and they did that
and that became the fundamental review of the trading book.
Now every other country is now gonna adopt
a fundamental review of the trading book.
And it's only the US that is, at least currently,
and we hope not permanently,
intending to say, "Oh no,
we're gonna adopt the fundamental review of the trading book
to address tail risk
and we're gonna keep our global market shock
as if none of that ever happened."
And that's a major conceptual problem
and that's what leads to
a grievous overcapitalization of the risk.
And we think, you know, again,
it's all very difficult to know
because it's predicting business lines.
It's, you know, to what extent then they optimize capital.
It's extremely complicated
and there's no way to put a number on it,
but I think it's very difficult to imagine
with the types of capital increases that are proposed here
that you would not see a significant diminution
in the amount of capital that banks are willing
to devote to principal risk market making.
(-)Let me, Greg, thanks for that, I wanna bring in.
(-)Can I just add, sorry Peter,
I just add it's a great question.
I just, first of all, it's just really rare
when all these groups raise their hand.
In this case, you know, housing, ag,
manufacturing, airlines,
they don't do it a lot, to your point.
And you cited something that occurred 13 or 14 years ago.
So it's a rarity when all of these groups raise their hand
and say, "I'm really worried about this proposal.
I think it's gonna negatively impact,
you know, our business model in one way, shape or form
and impair our ability to offer
this really important service to the American people."
So it's rare when it happens and I think it should be,
it's notable when it does and important when it does.
(-)And I'd say, I mean in this case,
that group has included the buy side,
really for the first time,
'cause you know, they want to be able to,
if they hold a block of securities,
they wanna be able to sell 'em.
And now for the, well, not for the first time,
it's been going on I think for five, 10 years,
they're hearing from, you know, their bank,
"Well if you wanna sell us, you know,
$10 million of that security, here's the price.
If you wanna sell us 100 million, we can't do that for you."
So I think end users are worried.
I mean, and the buy side's worried about that.
And then I think issuers are worried about it
because if you're trying to issue
a corporate security in the United States,
I mean part of your ability to sell that depends on
your credit quality.
Part of it depends on the interest rate
you're willing to pay.
But a lot of it also depends on
if I buy this security, am I gonna be able to sell it?
So I think issuers are also worried about this.
(-)Let me bring in,
I know I think two other people would like to weigh in,
Sayee Srinivasan of Austin, Chief Economist at ABA,
who I know this has been an area of particular interest
in research for you over the years,
including your time at the CFTC.
Anything you wanna add here?
(-)Yeah, so you know, it's not in the context of Volcker,
but in the context of client clearing,
something that Rob alluded to in his opening remarks.
And this is something which
we had covered when we were,
when I was at the CFTC.
The FSB had actually looked at how the capital rules have,
were impacting the ability of banks,
sort of other clearing firms to offer
clearing services to their clients
because central clearing was a big,
sort of a big part of the G20 global reform efforts.
And there was good documentation and evidence that
you know, the rules were not working.
And there was some recommendations that were submitted
and the Basel committee even accepted
some of those recommendations.
But the Fed and sort of the Basel III proposal
completely ignored all that analysis
and instead actually has gone over and beyond
sort of the standards.
So, and you know, we have a blog post on it
and the comment letter references it,
but it's, you know, Volcker is complex,
liquidity and other things are very interesting issues.
But here's a classic instance, example of
the collective regulators looked at an issue,
studied it, came up with a recommendation that opted it
at an international level,
but the Fed completely ignored all of it
and then went the other way.
So that's troubling from my perspective
as an ex-regulator who sort of looked at it very carefully.
Thanks.
(-)Sayee, thanks for that.
And I don't know, Kate, did you want to add something?
Kate Childress from BPI.
(-)Yeah, thanks, I just wanted, hi, Emily.
Hope you're doing well.
I just wanted to sort of level set on this,
'cause I think you're thinking more about
the derivatives campaign,
the end user campaign around derivatives,
which is slightly different than the Volcker discussion.
Happy to take it offline, but they actually,
the agencies did ultimately modify
the, you know, the derivatives proposals as put out.
So there was, so the, so there was no impact
because they actually fixed the problem largely,
which is why the end users, you know,
I think, you know, engaged the way they did.
But in any case, I think it's
a slightly different issue than Volcker,
but we can talk about it if you, if you're interested,
(Emily Flitter)That would be really helpful.
And thank you all again for this really helpful feedback.
(-)Absolutely, and I do need to mind the clock here.
I know some of our folks have a hard out at 1:30
and I wanna give both Greg and Rob an opportunity
to offer any final thoughts before we wrap up here.
Greg, I'll let you go first
and Rob, you'll follow after that.
(-)No, I have no final thoughts.
This is terrific,
I think the questions have been terrific
and have elicited everything pretty much
we wanted to get across.
So, thank you for your attention.
I know this is tough stuff,
so thanks for all your knowledge
and your willingness to focus on.
(-)Yeah, I echo that.
And thanks to the BPI team
for all the collaboration over the last several months
and weeks on this,
and to the journalists who joined,
thank you for the thoughtful questions.
I think it's incredibly important.
I think the economic consequences of getting this right are
really, really considerable,
and appreciate your time today
and wish everyone a Happy New Year and a good snow day.
(-)All right, Rob, Greg, everyone from the BPI team
and the ABA team,
thanks for joining us,
all of the members of the media, thanks for joining us.
If you have follow-up questions,
you know where to reach us at ABA and BPI.
Appreciate you guys taking the time out to listen
and consider our thoughts
and I hope you have a chance to take a deeper look
at the comment letter file today.
Thanks again and have a good rest of your day.