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Systemic Risk Council: Fed leverage proposal would bring 'unnecessary risks'

A Federal Reserve proposal that would lower capital requirements for the largest U.S. banks would "expose the American economy and people to unnecessary risks," the Systemic Risk Council warned Aug. 8.

The SRC, a private-sector group that includes several top former regulators, submitted a comment letter to the Fed and the Office of the Comptroller of the Currency on their proposal to adjust the enhanced supplementary leverage ratio. The capital requirement applies to the eight U.S.-based global systemically important banks, or G-SIBs, and is intended to reduce the risks of banks lacking enough capital to withstand a downturn.

The regulators' proposal would develop firm-specific requirements for those eight G-SIBs that would be lower than the current 5% standard.

Paul Tucker, the SRC chair and former deputy governor at the Bank of England, wrote in the letter that regulators "should be strengthening, not weakening" capital requirements for banks given that economic growth is accelerating. For instance, he wrote, the Fed could activate its countercyclical capital buffer and temporarily boost minimum capital levels for large banks.

The group said in a news release that it supports regulators' goal of simplifying current rules, but that the proposed change would "make the U.S. banking system materially less resilient."

Randal Quarles, the Fed's vice chairman for supervision, has called the proposal a "win-win" because the current structure has an unintended consequence of encouraging some banks to take on more risk. The proposal "simply restores the original intent" of the leverage standard by ensuring it takes a back seat to a separate capital standard that is risk-based and more appropriate, Quarles said in May.

But the plan has sown division among federal banking regulators. Fed Governor Lael Brainard dissented on the proposal, and the Federal Deposit Insurance Corp. declined to take part in the announcement.

The FDIC decision to not add its voice to the announcement was made under Martin Gruenberg's leadership. Gruenberg, an Obama appointee, is still on the FDIC board of directors, but bank regulatory analysts believe President Donald Trump's appointee to chair the FDIC, Jelena McWilliams, may take a different approach. McWilliams has been on the job since June 5.

In an interview with The Wall Street Journal last week, McWilliams said she is studying the FDIC's stance on the proposal and did not weigh in on it. She also said "the preference would be that" the three regulatory agencies move forward together.

The FDIC did agree with the Fed and OCC on a separate proposal to tweak parts of the Volcker Rule, which bans proprietary trading at banks.

The SRC, which lists former Fed Chairman Paul Volcker as a senior adviser, said it has "serious reservations" about an aspect of the proposed changes that gives banks more flexibility in determining appropriate trading activities.

Others on the SRC include former FDIC Chair Sheila Bair; former Securities and Exchange Commission Chairman William Donaldson; and Brooksley Born, a former chair of the Commodity Futures Trading Commission.