WASHINGTON, D.C.— Dennis Kelleher, Co-founder, President and CEO, issued the following statement on a meeting of the Federal Reserve’s (Fed) Board of Governors regarding proposed changes to the enhanced supplementary leverage ratio capital requirement:
“The only thing standing between a failing bank, a financial crisis, a taxpayer bailout, and economic and human catastrophe is the amount of capital a bank has to absorb its own losses. Today’s proposal by the Fed to lower capital requirements—and the expected similar actions by the other banking agencies—will ensure that the largest, most dangerous Wall Street megabanks are undercapitalized. That, along with the other deregulatory actions coming from the Fed, will bring the country more quickly towards the next significant financial crash.
“The proposed changes by the Fed will significantly weaken capital requirements for the largest, most complex, systemically important Wall Street megabanks, once again putting the interests of Wall Street over Main Street. Lowering leverage-based capital requirements, supposedly to help the Treasury markets, is a fundamentally misleading claim because it will fail to alleviate the pressure in the Treasury markets and instead will only increase risks to financial stability. We applaud Governor Barr and Governor Kugler for objecting and recognizing the unreasonable risks that the Fed is allowing with its proposal.
“The largest banks in the U.S. already have as much leverage as the largest hedge funds, and the changes proposed today will only increase that leverage and expose them, and the economy, to greater risk. That’s great for the Wall Street megabank CEOs and shareholders because more leverage means a higher return on equity, higher shareholder payouts, and higher executive bonuses. It’s bad for hardworking Main Street Americans because lower capital means higher risk of bank failures, financial crises, and taxpayer bailouts. And despite the claims, this proposal would do nothing to “help” the Treasury markets, as shown by research from the Fed itself.
“The Fed’s action today is part of a more comprehensive plan to deregulate the banking industry, which is undermining its credibility and integrity. It has shown repeatedly that it delivers for Wall Street’s megabanks, regardless of the merits or the risk to the financial system. For example, those megabanks engaged in a deceptive multi-million dollar campaign to attack the Basel capital proposal, which would have raised capital requirements to protect against the risks they pose to financial stability, the economy, and taxpayers. Fed Chair Powell himself was the chief lobbyist inside the Fed aggressively pushing the megabanks views into Fed policy.
“The capital framework proposed after the 2008 crash was designed to prevent the biggest, most dangerous banks from engaging in highly leveraged high-risk activities that threaten the financial stability and economy of the country. The framework had two mutually complementary aspects that ensured banks would have enough capital and not require taxpayer bailouts. One part was based on risk, and one was based simply on the overall amount of leverage at the bank. The idea was that one way or the other, Wall Street’s megabanks couldn’t threaten Main Street families. The Fed’s proposal today would collapse this two-part approach, lowering the leverage requirement in a way that makes it de facto more risk-based because it would be tied to the so-called GSIB surcharge. This would make bank failures, crises, and bailouts much more likely.
“The Fed’s action today is just one deregulatory item that has been on the industry’s ‘wish list’ for years, which the Fed appears to have now adopted as its agenda. The megabanks next will undoubtedly seek to lower the GSIB surcharge, which would, in effect, weaken both the leverage and risk-based requirements simultaneously. They will then likely finalize a version of the Basel capital rules that includes lowered risk-based requirements, not the increased requirements originally proposed. This is all on top of the megabanks’ ongoing efforts to weaken the stress tests and stress-based capital requirements.
“Put simply, the Fed is changing the entire capital framework to benefit the industry at the expense of the American taxpayer who the Fed is supposed to be protecting. This, along with an industry-pushed deregulatory agenda, is what the Fed did before the 2008 crash and its actions directly enabled that crash, its severity, and the multi-trillion-dollar bailouts. For the Fed to so soon repeat its inexcusable actions is an intentional dereliction of duty.”
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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.
