Lowering leverage capital for large banks doesn’t seem ‘prudent,’ outgoing FDIC leader says

A proposal to lower the leverage capital for large, systemically important banks doesn’t seem like a “prudent step,” the outgoing chairman of the federal deposit insurance agency said Tuesday.

In response to reporters’ questions following his presentation on first quarter results for federally insured banks, Federal Deposit Insurance Corp. (FDIC) Chairman Martin Gruenberg said the enhanced supplementary leverage ratio, adopted in the wake of the financial crisis, was “one of the key reforms that was implemented” to strengthen the capital of the largest, systemically important banks.

The proposal issued last month by the Federal Reserve and Office of the Comptroller of the Currency (OCC) would reduce the enhanced supplementary leverage ratio (eSLR) capital requirements applicable to the eight global systemically important banking organizations (GSIBs) headquartered in the United States (and would apply at both holding companies and their insured depository institution subsidiaries).

Gruenberg (who is acting as a holdover chairman of the agency since his term ended in November) said that the proposal would reduce leverage capital by about $120 billion. “In the current environment with the banks doing so well it frankly didn’t seem to me to be the prudent step to take to lower the capital of our systemic banks at this time,” Gruenberg said, referring to a statement he released in response to the proposal in April.

“Retaining that capital cushion that we have built up in the good times seems to me to be a prudent thing to do so that the banks would be better positioned when the inevitable change in the economic cycle comes. And again, we’re talking about our largest, most systemic financial institutions,” he said.

In other areas, Gruenberg declined to comment on efforts underway at other federal regulators to redefine the “Volcker Rule,” which prohibits banking firms from engaging in proprietary trading or entering into certain relationships with hedge funds and private-equity funds. Comptroller of the Currency Joseph Otting said earlier this month that a proposal will be unveiled by the end of this month. Gruenberg did, however, offer his views on the rule generally.

“The Volcker Rule is an important rule that addresses a key risk for financial institutions, which is proprietary trading, that benefits from the safety-net in the bank holding company,” Gruenberg said. “The Volcker Rule basically pushed that activity out of bank holding companies. The agencies have been reviewing the rule and considering changes that could be made to simplify compliance while maintaining the important purpose and objective of the rule.”

Gruenberg also had no particular advice for his successor as chairman, Jelena McWilliams, who is expected to be confirmed for the position sometime this week. “I think that the FDIC is an outstanding agency that does its job exceptionally well,” Gruenberg said. “And it will really be a tremendous opportunity for her to carry forward the work of the agency and its important responsibilities.” He said he “would not presume to speak for her.”