FDIC Director McKernan Warns Against "Binary" Debate on Basel Committee Endgame
Commentary by Steven Lofchie
FDIC Director Jonathan McKernan expressed skepticism on the Basel Committee's proposed "endgame" for capital standards.
In broad remarks at the annual meeting of the American Bar Association of American Law Schools, Mr. McKernan argued that (i) the banking regulators have not "offered any rationale for some of its key design decisions, and that has left us unable to defend or even understand important aspects of the Endgame standards that we have proposed to implement"; (ii) the latest proposal seemed rationalized "to engineer higher capital requirements" and "paid little heed to the associated economic costs"; and (iii) the "Endgame debate need not be binary," but rather be phased in to allow time to "finalize the less contested aspects of the Endgame standards and then later finalize the rest through future notice-and-comment rulemakings that can develop more defensible rationales for a U.S. implementation."
Separately, Mr. McKernan argued that the FDIC, as well as other bank regulators, "should revisit the regulatory comfort that we have provided some of the 'Big Three' [asset managers] as to how much they can own, and what activities they may engage in, without being found to 'control' a banking organization." He claimed that top asset managers are more than passive investors and companies that acquire direct or indirect control of a bank are subject to the Bank Holding Company Act and (i) restriction of commercial activities, (ii) capital and liquidity requirements and (iii) obligations to "serve as a source of strength to the controlled bank." Mr. McKernan emphasized the need to reconsider passivity commitments and investment stewardship when offering regulatory "comfort" to the Big Three.
Reflecting on the failures of Silicon Valley Bank and Signature Bank, Mr. McKernan argued that the FDIC should stop "privatizing gains and socializing losses" and "require certain large banking organization[s] to have outstanding a minimum amount of long-term debt."
Commentary
There is quite a bit here, but the following points stand out:
- Mr. McKernan's criticism over the failure by regulators to make the case in support of key aspects of the Basel Endgame, and his concerns as to the damage that the requirements might do to the economy, are consistent with views expressed by many in the banking industry.
- His position to "end our bailout culture" and to "accept the inevitability of bank failures" is fundamental to the debate on implementing an effective resolution framework. (As previously argued, there is no way in which the government can justify allowing the uninsured depositors of a small bank to take losses after it saved the depositors of SVB and Signature Bank.)
- Finally, his comments on the "Big Three" asset managers are reflective of numerous concerns that the major advisory firms are pushing a social agenda that may be inconsistent with their mission as investment advisers to serve their clients (which is not say that the reasons for his comments are the same as other critics of the Big Three).