US leverage ratio reform is back on the table
24 January 2018 Washington
Image: Shutterstock
Wall Street is set to get another bite of the cherry to re-open the debate on the controversial leverage ratio rules under Basel III, that currently stifles securities lending activity in the US, with the appointment of Jelena McWilliams as head of Federal Deposit Insurance Corporation (FDIC) yesterday.
In the US, the current leverage ratio requires equity capital to be held against assets, including cash, on an unweighted basis.
Conflicting views around the appropriateness of such measures, which are less strict in other major markets such as the EU, has been ongoing since the rules implementation began in 2014.
Critics of the US interpretation include the US Treasury Department, which questioned the need to place a risk weighting on cash—a traditionally highly-liquid and relatively stable asset.
Several major US banks, including BNY Mellon and State Street, both of which had a strong interest in seeing the rules amended, have also waded in on the issue with calls to review scope of the ratio.
Commenting on the potential for a fresh look at the leverage ratio, Fran Garritt, of the Risk Management Association, said: “Agency lending, even with indemnification, is not an on-balance sheet activity, and thus any easing of leverage limits will not have a direct impact on that activity.”
“That said, the leverage ratio does have a balance sheet impact on banks and bank-owned broker dealers which represent the vast majority of securities lending activity from agent lenders, and any reduction of overall capital requirements for borrowers would improve the demand to borrow securities more generally.”
Despite little in the way of tangible relief for banks being achieved during Trump’s first year in office, senior US regulators are cognisant of the need to come back to the negotiating table to settle lingering pain points, such as the leverage ratio.
Speaking at the American Bar Association Banking Law Committee Annual Meeting last week, Randal Quarles, vice chairman for Bank Supervision on the Federal Reserve Board of Governors, said: “Leverage ratio re-calibration also is among the Federal Reserve's highest-priority, near-term initiatives.”
“We have made considerable progress on that front in the past few months, and I expect that you will see a proposal on this topic relatively soon.”
Industry participants are taking hope from the fact that McWilliams takes the helm from outspoken critic of regulation rollback, Martin Gruenberg.
Gruenberg, who was nominated by former President Barack Obama in 2012 for a five-year term, has been accused of dragging his feet on practical reforms to post-crisis regulation in the face of mounting evidence of the need for reform.
Commenting on revisiting post-crisis financial regulations during a speech at the Washington Brookings Center in November 2017, he said: “ … the danger is that changes to regulations could cross the line into substantial weakening of requirements. Let’s be clear: our largest banking organisations are not voluntarily holding the enhanced capital and liquid asset cushions required by current rules.”
“Some have made quite clear that, left to their own devices, they would operate with less capital and less liquidity. If and when some banks go down such a path, others will be pressured by their shareholders to do so as well, to boost return on equity by operating with less capital.”
Bankers associations such as Independent Community of Bankers of America (ICBA) expects that the new chair will “help alleviate crushing regulatory burden”, including bank leverage limits easing.
Despite releasing conflicting and contradictory statements during his campaign and first year in office on his policy towards the policing of Wall Street, Trump is widely expected to cut red tape in the banking sector rather than add to it.
In the US, the current leverage ratio requires equity capital to be held against assets, including cash, on an unweighted basis.
Conflicting views around the appropriateness of such measures, which are less strict in other major markets such as the EU, has been ongoing since the rules implementation began in 2014.
Critics of the US interpretation include the US Treasury Department, which questioned the need to place a risk weighting on cash—a traditionally highly-liquid and relatively stable asset.
Several major US banks, including BNY Mellon and State Street, both of which had a strong interest in seeing the rules amended, have also waded in on the issue with calls to review scope of the ratio.
Commenting on the potential for a fresh look at the leverage ratio, Fran Garritt, of the Risk Management Association, said: “Agency lending, even with indemnification, is not an on-balance sheet activity, and thus any easing of leverage limits will not have a direct impact on that activity.”
“That said, the leverage ratio does have a balance sheet impact on banks and bank-owned broker dealers which represent the vast majority of securities lending activity from agent lenders, and any reduction of overall capital requirements for borrowers would improve the demand to borrow securities more generally.”
Despite little in the way of tangible relief for banks being achieved during Trump’s first year in office, senior US regulators are cognisant of the need to come back to the negotiating table to settle lingering pain points, such as the leverage ratio.
Speaking at the American Bar Association Banking Law Committee Annual Meeting last week, Randal Quarles, vice chairman for Bank Supervision on the Federal Reserve Board of Governors, said: “Leverage ratio re-calibration also is among the Federal Reserve's highest-priority, near-term initiatives.”
“We have made considerable progress on that front in the past few months, and I expect that you will see a proposal on this topic relatively soon.”
Industry participants are taking hope from the fact that McWilliams takes the helm from outspoken critic of regulation rollback, Martin Gruenberg.
Gruenberg, who was nominated by former President Barack Obama in 2012 for a five-year term, has been accused of dragging his feet on practical reforms to post-crisis regulation in the face of mounting evidence of the need for reform.
Commenting on revisiting post-crisis financial regulations during a speech at the Washington Brookings Center in November 2017, he said: “ … the danger is that changes to regulations could cross the line into substantial weakening of requirements. Let’s be clear: our largest banking organisations are not voluntarily holding the enhanced capital and liquid asset cushions required by current rules.”
“Some have made quite clear that, left to their own devices, they would operate with less capital and less liquidity. If and when some banks go down such a path, others will be pressured by their shareholders to do so as well, to boost return on equity by operating with less capital.”
Bankers associations such as Independent Community of Bankers of America (ICBA) expects that the new chair will “help alleviate crushing regulatory burden”, including bank leverage limits easing.
Despite releasing conflicting and contradictory statements during his campaign and first year in office on his policy towards the policing of Wall Street, Trump is widely expected to cut red tape in the banking sector rather than add to it.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
