The CFA Institute Systemic Risk Council (Council) latest comment letter was submitted August 25 to U.S. bank regulators voicing strong concerns over proposed changes that would weaken key capital adequacy protections put in place during the Great Financial Crisis era (GFC), specifically, the enhanced Supplementary Leverage Ratio (eSLR), Total Loss-Absorbing Capacity (TLAC), and long-term debt capital requirements for the eight largest and most complex banks in the U.S., commonly referred to as Global Systemically Important Banks (GSIBs).
The Council’s co-Chairs noted that the proposals would dismantle key post-GFC safeguards that are in place to protect the U.S. economy from bank failures and systemic risk. In doing so, the bank regulators proposing these regulatory rollbacks have failed to show any compelling benefit to the real economy while exposing the financial system to increased instability and taxpayer risk.
Key Objections to the proposed deregulation of bank capital rules include:
- Increased Systemic Risk Without Clear Benefit: The proposal would significantly lower required capital buffers without adequate justification or cost-benefit analysis. The SRC warns this could lead to increased capital distributions to shareholders, further weakening the resilience of the banking sector.
- Undermining Post-Crisis Safeguards: The proposed changes would reduce the average eSLR buffer from 2% to approximately 0.85% for holding companies and from 6% to 3.84% for the “Insured Depository Institution” or “IDI” of such holding companies. Long-term debt and TLAC buffers would also be substantially reduced.
- Ignoring Historical Lessons: The Council emphasized the critical role that improved leverage limits played after the 2008 crisis and the recent Eurozone debt crisis, warning that risk-based capital rules alone are insufficient. The SLR is uniquely designed to capture off-balance-sheet risks and prevent regulatory arbitrage.
- Mischaracterizing the SLR’s Role: Contrary to the Agencies’ claim, the SRC notes that the SLR was never intended solely as a “backstop,” but as a complement and improvement to risk-based rules to ensure comprehensive protection.
- Treasury Market Rationale is Unconvincing: The Council rejects the notion that the current leverage framework has constrained U.S. Treasury market intermediation, pointing to increased UST holdings by both banks and primary dealers.
- Sovereign Subsidy Concerns: Reducing capital requirements to support demand for U.S. Treasuries risks distorting market rates and creates a hidden “sovereign subsidy” that could impair the integrity of reference rates used in mortgages and other financial instruments across the financial system.