Statement of
Martin J. Gruenberg, Chairman,
Federal Deposit Insurance Corporation
On
Wall Street Reform: Assessing
and
Enhancing the Financial Regulatory System
before the
Committee on Banking, Housing, and Urban Affairs;
U.S. Senate; 538 Dirksen
Senate Office Building
September 9, 2014
Chairman Johnson, Ranking Member Crapo and members of the Committee, thank you
for the opportunity to testify today on the Federal Deposit Insurance Corporation's
(FDIC) actions to implement the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act).
My written testimony will address several key topics. First, I will discuss capital and
liquidity rules that the bank regulatory agencies recently finalized, as well as a recently
proposed margin rule on derivatives. Second, I will provide an update on our progress in
implementing the authorities provided the FDIC relating to the resolution of systemically
important financial institutions (SIFIs). I will then discuss an updated proposed risk
retention rule for securitizations and implementation of the Volcker Rule. Finally, I will
discuss our supervision of community banks, including the FDIC's efforts to address
emerging cybersecurity and technology issues.
Capital, Liquidity and Derivative Margin Requirements
The new regulatory framework established under the Dodd-Frank Act augments and
complements the banking agencies' existing authorities to require banking organizations
to maintain capital and liquidity well above the minimum requirements for safety and
soundness purposes, as well as to establish margin requirements on derivatives. The
recent actions by the agencies to adopt a final rule on the leverage capital ratio, a final
rule on the liquidity coverage ratio, and a proposed rule on margin requirements for
derivatives address three key areas of systemic risk and, taken together, are an
important step forward in addressing the risks posed particularly by the largest, most
systemically important financial institutions.
Supplementary Leverage Ratio
In April 2014, the FDIC published a final rule that, in part, revises minimum capital
requirements and, for advanced approaches banks,1 introduces the supplementary
leverage ratio requirement. The Office of the Comptroller of the Currency (OCC) and the
Federal Reserve adopted a final rule in October 2013 that is substantially identical to
Martin J. Gruenberg, Chairman,
Federal Deposit Insurance Corporation
On
Wall Street Reform: Assessing
and
Enhancing the Financial Regulatory System
before the
Committee on Banking, Housing, and Urban Affairs;
U.S. Senate; 538 Dirksen
Senate Office Building
September 9, 2014
Chairman Johnson, Ranking Member Crapo and members of the Committee, thank you
for the opportunity to testify today on the Federal Deposit Insurance Corporation's
(FDIC) actions to implement the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act).
My written testimony will address several key topics. First, I will discuss capital and
liquidity rules that the bank regulatory agencies recently finalized, as well as a recently
proposed margin rule on derivatives. Second, I will provide an update on our progress in
implementing the authorities provided the FDIC relating to the resolution of systemically
important financial institutions (SIFIs). I will then discuss an updated proposed risk
retention rule for securitizations and implementation of the Volcker Rule. Finally, I will
discuss our supervision of community banks, including the FDIC's efforts to address
emerging cybersecurity and technology issues.
Capital, Liquidity and Derivative Margin Requirements
The new regulatory framework established under the Dodd-Frank Act augments and
complements the banking agencies' existing authorities to require banking organizations
to maintain capital and liquidity well above the minimum requirements for safety and
soundness purposes, as well as to establish margin requirements on derivatives. The
recent actions by the agencies to adopt a final rule on the leverage capital ratio, a final
rule on the liquidity coverage ratio, and a proposed rule on margin requirements for
derivatives address three key areas of systemic risk and, taken together, are an
important step forward in addressing the risks posed particularly by the largest, most
systemically important financial institutions.
Supplementary Leverage Ratio
In April 2014, the FDIC published a final rule that, in part, revises minimum capital
requirements and, for advanced approaches banks,1 introduces the supplementary
leverage ratio requirement. The Office of the Comptroller of the Currency (OCC) and the
Federal Reserve adopted a final rule in October 2013 that is substantially identical to
the FDIC's final rule. Collectively, these rules are referred to as the Basel III capital
rules.
The Basel III rulemaking includes a new supplementary leverage ratio requirement – an
important enhancement to the international capital framework. Prior to this rule, there
was no international leverage ratio requirement. For the first time, the Basel III accord
included an international minimum leverage ratio, and consistent with the agreement,
the Basel III rulemaking includes a three percent minimum supplementary leverage
ratio. This ratio, which takes effect in 2018, applies to large, internationally active
banking organizations, and requires them to maintain a minimum supplementary
leverage ratio of three percent (in addition to meeting other capital ratio requirements,
including the agencies' long-standing Tier 1 leverage ratio).
In April 2014, the FDIC, the OCC and the Federal Reserve also finalized an Enhanced
Supplementary Leverage Ratio final rule for the largest and most systemically important
bank holding companies (BHCs) and their insured banks. This rule strengthens the
supplementary leverage capital requirements beyond the levels required in the Basel III
accord. Eight banking organizations are covered by these Enhanced Supplementary
Leverage standards based on the thresholds in the final rule.
The agencies' analysis suggests that the three percent minimum supplementary
leverage ratio contained in the international Basel III accord would not have appreciably
mitigated the growth in leverage among SIFIs in the years leading up to the crisis.
Accordingly, the Enhanced Supplementary Leverage standards that the agencies
finalized in April will help achieve one of the most important objectives of the capital
reforms: addressing the buildup of excessive leverage that contributes to systemic risk.
Under the Enhanced Supplementary Leverage standards, covered insured depository
institutions (IDIs) will need to satisfy a six percent supplementary leverage ratio to be
considered well capitalized for prompt corrective action (PCA) purposes. The
supplementary leverage ratio includes off-balance sheet exposures in its denominator,
unlike the longstanding U.S. leverage ratio which requires capital only for balance sheet
assets. This means that more capital is needed to satisfy the supplementary leverage
ratio than to satisfy the U.S. leverage ratio if both ratios were set at the same level. For
example, based on recent supervisory estimates of the off-balance sheet exposures of
these banks, a six percent supplementary leverage ratio would correspond to roughly
an 8.6 percent U.S. leverage requirement. Covered BHCs will need to maintain a
supplementary leverage ratio of at least five percent (a three percent minimum plus a
two percent buffer) to avoid restrictions on capital distributions and executive
compensation. This corresponds to roughly a 7.2 percent U.S. leverage ratio.
An important consideration in calibrating the Enhanced Supplementary Leverage ratio
was the idea that the increase in stringency of the leverage requirements and the risk-
based requirements should be balanced. Leverage capital requirements and risk-based
capital requirements are complementary, with each type of requirement offsetting
potential weaknesses of the other. In this regard, the Basel III rules strengthened risk-
rules.
The Basel III rulemaking includes a new supplementary leverage ratio requirement – an
important enhancement to the international capital framework. Prior to this rule, there
was no international leverage ratio requirement. For the first time, the Basel III accord
included an international minimum leverage ratio, and consistent with the agreement,
the Basel III rulemaking includes a three percent minimum supplementary leverage
ratio. This ratio, which takes effect in 2018, applies to large, internationally active
banking organizations, and requires them to maintain a minimum supplementary
leverage ratio of three percent (in addition to meeting other capital ratio requirements,
including the agencies' long-standing Tier 1 leverage ratio).
In April 2014, the FDIC, the OCC and the Federal Reserve also finalized an Enhanced
Supplementary Leverage Ratio final rule for the largest and most systemically important
bank holding companies (BHCs) and their insured banks. This rule strengthens the
supplementary leverage capital requirements beyond the levels required in the Basel III
accord. Eight banking organizations are covered by these Enhanced Supplementary
Leverage standards based on the thresholds in the final rule.
The agencies' analysis suggests that the three percent minimum supplementary
leverage ratio contained in the international Basel III accord would not have appreciably
mitigated the growth in leverage among SIFIs in the years leading up to the crisis.
Accordingly, the Enhanced Supplementary Leverage standards that the agencies
finalized in April will help achieve one of the most important objectives of the capital
reforms: addressing the buildup of excessive leverage that contributes to systemic risk.
Under the Enhanced Supplementary Leverage standards, covered insured depository
institutions (IDIs) will need to satisfy a six percent supplementary leverage ratio to be
considered well capitalized for prompt corrective action (PCA) purposes. The
supplementary leverage ratio includes off-balance sheet exposures in its denominator,
unlike the longstanding U.S. leverage ratio which requires capital only for balance sheet
assets. This means that more capital is needed to satisfy the supplementary leverage
ratio than to satisfy the U.S. leverage ratio if both ratios were set at the same level. For
example, based on recent supervisory estimates of the off-balance sheet exposures of
these banks, a six percent supplementary leverage ratio would correspond to roughly
an 8.6 percent U.S. leverage requirement. Covered BHCs will need to maintain a
supplementary leverage ratio of at least five percent (a three percent minimum plus a
two percent buffer) to avoid restrictions on capital distributions and executive
compensation. This corresponds to roughly a 7.2 percent U.S. leverage ratio.
An important consideration in calibrating the Enhanced Supplementary Leverage ratio
was the idea that the increase in stringency of the leverage requirements and the risk-
based requirements should be balanced. Leverage capital requirements and risk-based
capital requirements are complementary, with each type of requirement offsetting
potential weaknesses of the other. In this regard, the Basel III rules strengthened risk-