Gruenberg, again, calls for reconsideration of proposal to reduce G-SIB capital requirements

A proposal to reduce capital requirements for global systemically important banks (G-SIBs) would be a serious weakening of post-financial crisis reforms, a member (and former chairman) of the Federal Deposit Insurance Corp. (FDIC) Board said Thursday.

He urged financial regulators to give “serious reconsideration” to the plan.

Martin J. Gruenberg, in remarks before the Peterson Institute for International Economics of Washington, D.C., said the proposed changes for the banks (which would, he said, result in “substantially lowering leverage capital requirements”) would increase risks to the institutions and, ultimately, to the bank deposit insurance fund.

Gruenberg served as chairman of the FDIC from 2012 to last June. (He previously served as acting chairman from November 2005 to June 2006, and again from July 2011 to November 2012, when he was named to a five-year term as chairman; his current term as a member of the FDIC Board is set to end in November of this year.)

“Significantly reducing G-SIB bank capital requirements will increase the risk of financial counterparty runs, reduce their ability to absorb losses, make them less able to lend in an economic downturn, increase their likelihood of failure, and increase risk to the Deposit Insurance Fund,” Gruenberg said. He also noted that lower leverage capital requirements for the institutions “would cause them to become substantially more leveraged than they are today.”

In April, the Federal Reserve and the Office of the Comptroller of the Currency (OCC) proposed changes that would reduce the enhanced supplementary leverage ratio (eSLR) capital requirements applicable to the eight global systemically important banking organizations (G-SIBs) headquartered in the United States (and would apply at both holding companies and their insured depository institution subsidiaries).

The FDIC, with Gruenberg as chairman, that same month declined to join in proposing the rule. Gruenberg said, at the time, that the amount of tier 1 capital required of the lead insured depository institution subsidiaries under the proposal would be about $121 billion less to be considered well-capitalized. “Given these reductions in capital requirements, the FDIC did not join the Federal Reserve and the OCC in issuing the proposed rule,” Gruenberg said in a statement in April.

He repeated those concerns at a press conference in May, as well as in Thursday’s remarks at the Peterson Institute.

“The changes would have the effect of reducing the capital requirement,” Gruenberg said, referring to the Fed/OCC proposal. “They are not technical fixes. They would significantly weaken constraints on financial leverage in systemically important banks put in place in response to the crisis.”

Gruenberg noted that the current, nine-year economic recovery – “the second longest on record” – wouldn’t last forever, and he indicated another economic downturn is inevitable.

“It seems to me that the first lesson of the recent financial crisis for the federal banking agencies is to ensure that our systemically important banks are positioned to manage the next downturn, whenever it occurs, without disruption to the institutions or the financial system,” Gruenberg said.

“Ideally they should be able to sustain their lending activity to support the economy. Reducing the capital of these insured banks by $121 billion would be a failure to learn that lesson. I would hope therefore that serious reconsideration is given to this proposal.”

An Essential Post-Crisis Reform Should Not Be Weakened: The Enhanced Supplementary Leverage Capital Ratio, Remarks by Martin J. Gruenberg, Member, Board of Directors, Federal Deposit Insurance Corporation, to the Peterson Institute for International Economics, Washington, D.C.

Be the first to comment

Leave a Reply

Your email address will not be published.