Financial Services Associations Urge Regulators to Reconsider BCBS Capital Requirements

A number of financial services associations called for regulatory agencies to do "substantial additional work" on the Basel Committee on Banking Supervision's (“BCBS”) proposed framework, in advance of the U.S. consideration of the Fundamental Review of the Trading Book ("FRTB") rules. In a letter to the U.S. Department of the Treasury, the Office of the Comptroller of the Currency, the Federal Reserve Board of Governors and the FDIC, SIFMA et. al., warned of “potentially very negative impact[s] that the FRTB rules would have on the American financial markets, particularly as related to securitized products in the United States."

Specifically, the associations' concerns included:

• major increases in capital requirements: on average, required capital levels for securitization positions would more than double;

• overlaps between trading book and banking book position requirements;

• "steep capital increases for holding securitized products" forcing banks to turn to alternatives of (i) reducing or eliminating this activity depending on how far below return hurdle rates the activity is; or (ii) imposing greater costs to the investor base through wider bid/offer spreads or enhanced turnover; and

• a decrease in secondary market capacity, which "would likely have the effect of decreasing the availability of or increasing the cost of credit." This, in turn, "would reduce the attractiveness of the assets for investors, who may demand additional premiums as part of origination, making issuance more expensive for originators."

Prior to establishing a BCBS Framework, the associations urged the regulators to:

(i) significantly adjust capital requirements;

(ii) make certain that the amendments provide "a liquid and efficient private market for non-agency residential mortgage-backed securities," which is "critical and essential to the successful resolution of Fannie Mae and Freddie Mac and to restore mortgage credit availability"; and

(iii) utilize a "monitoring exercise" on a granular level to "ensure that FRTB's impacts on the securitization markets are fully understood and would not impose undue costs on the American financial system without demonstrated and publicly-considered benefits."

The associations emphasized that "merely cosmetic changes to the capital levels will not solve this problem [of a potentially negative impact on the American financial markets] - significant amendments are needed to eliminate the overlapping requirements, excessive credit spread risk charges and other problems."