Sifma CEO Says Basel III Endgame Will Impede Capital Markets

I am curious, Ken. I mean, I was going through some of the transcripts from what you guys talked about yesterday. And no surprise here, a lot of folks still concerned. But I wonder if you could kind of square that circle ’cause you had some folks on the kind of fringes of finance right now that are still fighting to block some of these rules. But then you hear from folks like Steinhauer over at Huntington, who I guess is just kind of resigned to it. It’s like this is going to happen, we need to prepare for it here. Is there some sort of middle ground here that we should prepare for? Are there going to be changes? Well, I, I, I think if we take, first of all, thank you for having me on. I think if we take Chair Pal at his word and I do that, they’re going to be substantive and material changes to the rule. I think I rule proposals. I think that’s a good thing and even possibly a re proposal, which Chairman Pal didn’t rule out. And, and you saw, if you saw our panel yesterday, our conference yesterday, you know, Governor Bowman from the Fed said there should be a RE proposal. We think there should be a RE proposal. And I think the difference in Huntington’s a fabulous institution, by the way, I think the difference is what, what, what, what type of business is your bank in? And the, and the larger dealer banks are really negatively affected by this. So I think most large banks if not all, all large banks in the US including it from Huntington on up certainly have very high capital levels well before the Basel 3 proposal was put out. It’s the structure of their business. So if you and what we’re particularly concerned about is the impact on the capital markets business and if you look at it particularly the USG Sibs, they are dominant players in the US capital markets business along with the foreign G Sibs. And that’s going to be very negatively impacted by the proposal with capital charges going up as much as 130% on traditional products like securitization or securities financing transactions. So that’s really where people need to focus. And I think a lot of people are focusing on that. Ken, just to play devil’s advocate, though, I think some of the folks who backed this proposal, which was formally unveiled last year, look at it and say, look, this is about making the financial industry safer, preventing bank failures, or at least sort of, you know, trying to sort of stem the potential for those failures here as this proposal stands right now. Does that not do that Well, I’d start with the premise that we made the system more stable to where we are today. This Basel 3 end game proposal has been 10 years in the making, but over that time we’ve seen bank capital grow exponentially in the US And so I think in terms of aggregate capital, you know, we’ve really hit a, you know, the target of where we should be. What the problem. The problem with this proposal is not just the total capital it raises on the overall bank, but again, what it does in the capital market side and then how it interacts with existing prudential requirements and liquidity requirements such as things like the stress test and something known as the global market shock. And when you put those together with this proposal, you really do impede capital markets activities of the large dealer banks. And the problem with that, as you know, is we fund 75% of commercial activity in the US through the capital markets. That’s a good thing, but that’s going to have a transmission effect if you raise capital costs by the level that’s being talked about, the way this rule plays out. So that’s why it definitely needs, frankly, in our view, a REAP proposal. the Fed and the potential regulators are only now doing a quantitative impact study, which they should have done before this proposal. They need to put that out for comment. We believe they will and and they really, if they are going to make material changes, they really need to put the whole proposal out for additional comment. So this is 10 years in the making. the Fed has already made clear that there will be changes. You’re talking about a REAP proposal. Is the goal here to just not propose anything to kind of keep what we have? I think the goal here is to get it right. And if you think about it in terms of how Basel 3, it came, how the iterations of it, the Basel Committee itself went through a REAP proposal because they put out an initial proposal, they did a quantitative impact study, they realized that they needed to do another. Then they went and REAP proposed and rewrote the proposal. It was supposed to be a capital neutral proposal and and really trying to equalize capital across jurisdictions around the globe. But what the Fed and the other agencies have come out with doesn’t do that. So a re proposal is a process of getting it right. It’s not unprecedented at all. And, and frankly, I think if the agencies had done their quantitative impact study on their proposal before they put this out it, they would have been a better place. But it’s it again. It’s about getting it right, not getting it done fast.