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Gruenberg: Regulators' leverage plan a 'serious weakening' of regulations

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Gruenberg: Regulators' leverage plan a 'serious weakening' of regulations

A proposal to lower leverage requirements for the largest U.S. banks would amount to a "serious weakening" of postcrisis regulatory reforms, a top official at the Federal Deposit Insurance Corp. said Sept. 6.

Martin Gruenberg, who led the FDIC until earlier this year and is on its board of directors, said the proposal from two other federal regulatory agencies would "substantially lower the capital" that regulators require banks to hold onto as a safeguard. Gruenberg spoke at a Peterson Institute for International Economics event.

The proposal from the Federal Reserve and Office of the Comptroller of the Currency would adjust the enhanced supplementary leverage ratio, or eSLR, which applies to the eight U.S.-based global systemically important banks. It would develop a firm-specific eSLR for each company, though their new requirements would be lower than the current standard.

Under Gruenberg's leadership, the FDIC had declined to join the two agencies' proposal. The FDIC's new leader, Jelena McWilliams, told reporters Aug. 23 that she was still reviewing whether the agency should reassess that position.

Supporters of the proposal say a separate risk-based capital requirement should be the main capital safeguard for banks, and that the current leverage requirement has an unintended consequence of pushing some firms into riskier activities. For example, Fed Vice Chairman for Supervision Randal Quarles said in May that the proposal restores regulators' original intent and that it would "encourage prudent behavior without any material capital reduction or cost to the system's resiliency."

But Gruenberg said the leverage tool is important because separate risk-based measures have at times dramatically underestimated how risky certain sectors may be. He also pointed to an estimate in the proposal that projects that the Tier 1 capital required for the G-SIBs' lead insured depository subsidiaries would drop by about $121 billion. The decrease for the holding companies is projected to be far lower, at about $400 million.

He said in response to a question that he sees "no reason" to lower capital requirements either at the holding company level or at their leading banks. But since the effect on the bank subsidiaries is much larger, that "would be the priority" for him to try to seek changes as regulators move forward with the proposal.

"That's really why I'm giving this speech, to try to make that point as clearly as possible," he said. "Because I do think there's really a compelling public interest here in preserving that capital at these large systemic banks."

Gruenberg has been at the FDIC since 2005 and is one of the four current members on the FDIC board. The other three are Trump administration appointees: McWilliams, OCC head Joseph Otting, and acting director of the Consumer Financial Protection Bureau Mick Mulvaney.