Banking Supervision Regulation - Comment Letters

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Comment letters addressing banking supervision regulations.

American Bankers Association - August 26, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 26, 2011

From the comment letter:

"...we have fundamental reservations regarding both the underlying concept of a significant additional capital surcharge on globally systemically important banks (G-SIBs) as well as the design of the indicator-based methodology described in the Consultation Document. We believe that as proposed they will in fact reduce the ability of the banking industry to serve customers. We do not accept the view that more capital is always the answer and strongly believe that excessive capital requirements are economically inefficient, permanently reducing the economic growth potential of the nation...We believe that it is possible and necessary to end the too-big-to-fail notion, a position that was also reinforced by the United States executive and legislative leaders at the time of the enactment of the Dodd-Frank Act. We also note that the Financial Stability Board (the FSB) is currently working on a parallel effort to ensure that member nations adopt resolution protocols that clearly and effectively enable orderly liquidation of any failing institution without taxpayer support. This effort underscores the conclusion that the negative consequences associated with institutions perceived as too-big-to-fail can be effectively addressed without a punitive add-on capital requirement."

"ABA strongly believes that the current proposal should be withdrawn and reconsidered. Any re-proposal should contain a transparent and empirically supported methodology; take into account the domestic regulatory environment in which banks operate, including resolution regimes; demonstrate that the benefits exceed the costs of reduced economic growth; and address other concerns highlighted in this letter. The current fragile condition of the global economy will not well tolerate such a risky experiment as that offered in the current proposal."

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Association of German Bankers - August 25, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 25, 2011

From the comment letter:

  • "It is difficult to understand how the Basel Committee comes to the conclusion that the Basel III regulations, which have not yet entered into force and on whose application no experience has yet been gathered, are insufficient to address the risks of globally systemically important banks. The argument that G-SIBs cause negative externalities ignores the fact that, besides these negative effects, positive external effects also play a role in the global financial system, which are of great benefit to the real economy."
  • "...it is highly important that the Gzo's demands are translated into action properly. In our view, this means initially setting low additional requirements which - if justified - can subsequently be tightened. In this way, the imminent risk of overstraining the financial sector could be avoided."
  • "...it is questionable whether it is actually possible for large internationally operating banks to significantly reduce their systemic importance based on the score produced by the proposed assessment methodology without fundamentally altering their business model and business structure, while at the same time avoiding any negative implications for the real economy. We believe that the measures proposed for G-SIBs by the Basel Committee hamper future economic growth by generally punishing and thus limiting any increase in size."
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Bank of China - August 23, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 23, 2011

Summary of key points from the comment letter:

  • Expand the scope of application of contingent capital instrument.
  • Define the relationship between additional capital requirement and Pillars 1 & 2.
  • Define the coordination mechanism for cross-border supervisory policies and set the adjustment scope of supervisory judgment.
  • Properly adjust information collection frequency of assessment on G-SIBs.
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Bank of New York Mellon/State Street Corporation/Northern Trust Corporation - August 26, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 26, 2011

From the comment letter:

"We understand the BCBS’s conceptual basis for measuring systemic importance using the five proposed categories. However, we believe there are a number of opportunities to improve the proposed indicators to make them more risk sensitive and meaningful in arraying institutions based on systemic risk. In particular, we believe there are significant opportunities to improve the indicators used to measure the Substitutability of bank activities that can contribute to systemic risk. Most notably, we believe the use of Assets Under Custody ‘AUC’ duplicates risks covered by other indicators and overstates the nature of the systemic risks posed by custody services. We do not believe a broad metric such as AUC merits inclusion in a limited set of key indicators that address the contribution substitutability can make to systemic risk. We therefore encourage the BCBS to reconsider the critical activities captured in the indicators for substitutability to be more consistent with the purpose for this category.

"We also believe that there are opportunities to improve the risk sensitivity of the three indicators proposed for measuring Interconnectedness and to make them more consistent with the identification of systemic risk and established BCBS standards."

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Barclays - August 26, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 26, 2011

From the comment letter:

"In order to meet the objectives of the Committee, we consider that any G-SIB buffer should meet the following key requirements:

  • Economic cost of meeting the G-SIB requirements should be kept to a minimum, given the diminishing value of ever increasing capital buffers as a tool for reducing financial instability/systemic risk. The means to achieve this is by use of Contingent Capital Instruments (“CoCos”) rather than Common Equity Tier 1 (“CET 1”);
  • Systemically important firms should be identified using a transparent risk based methodology that explicitly incentivises banks to take action to reduce, and penalises banks for increasing their systemic risk.
  • Implementation should be delayed beyond the transition period for the conservations buffer."


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BNP Paribas - August 26, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 26, 2011

Summary of key points from the comment letter:

  • Good regulation must be convincing, credible and transparent;
    • The capital surcharge imposed on some designated banks fails to fully meet these criteria.
    • The methodology determining the magnitude and distribution of the capital surcharge is not entirely credible.
  • It should not harm the economy, particularly when the latter is fragile and dependent on the banking system as in Europe; and
  • Governance, Supervision practices and Resolution tools are much more critical for the stability of the financial system than excessive capital.
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British Bankers Association - August 26, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 26, 2011

From the comment letter:

"The introduction of G-SIB specific measures needs to be carefully balanced against the higher capital and other measures being introduced through Basel III and the other post crisis initiatives (the most significant of which being those related to higher capital charges). These measures all safeguard and reduce systemic risk, and in order to avoid double counting, it is essential that any additional requirements do not replicate what is already in place.

"Based on this assumption we support the acknowledgement that the proposed G-SIB extension to the capital conservation buffer is part of a ‘menu of approaches’ to address the externalities posed by G-SIBS. Furthermore, loss absorbency at group level needs to be reevaluated so it does not result in additional requirements at different levels, leading to potential double charging and regulatory uncertainty."

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Canadian Bankers Association - August 25, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 25, 2011

In the comment letter, the CBA expresses its concerns on:

  • The lack of transparency of the consultative document;
  • The methodolgy, i.e., its reliance on "relative scoring;" and
  • Flexibility of the methodology.
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Clearing House Association/Institute of International Bankers - August 26, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 26, 2011
From the comment letter:

"In view of the fundamental flaws in the design of the Proposal and its indicator-based methodology, recent national and international bank regulatory reform efforts as well as the uncertain benefits and potentially significant costs of, and the considerable risks to the international financial system and the global economy that could be posed by, a significant additional capital surcharge on G-SIBs, we believe that the Proposal is at best premature and must be substantively reconsidered. Certainly, the Basel Committee should not finalize and move ahead with a concept that is, by its own account, based on uncertain data points that have, in many cases, yet to be gathered or defined in a consistent way across jurisdictions."

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European Banking Federation - August 26, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 26, 2011
Key points from the comment letter:

  • The incentives to resolvability should be taken on board in the proposed model.
  • The framework should be extended to non-banking financial institutions.
  • The assessment methodology should be sensitive to the total systemic risk of the whole sample and not only the relative position within the sample.
  • The model should include risk-sensitive measures to complement and improve accounting figures.
  • The benefits of diversification should be factored in for the sake of preserving the right incentives.
  • Contingent capital should be eligible as a G-SIBs buffer instrument.
  • The G-SIB buffer should be established as a distinct range above the capital conservation buffer to avoid the “cliff effect” of the restriction on distributions.
  • The activities financed by an affiliate in the country and currency where it is domiciled should be considered local activities and not cross border.
  • The nature of the EU single market should mean that intra-EU transactions are not treated as cross-jurisdictional activity.
  • Any additional loss absorbency should only be required at the consolidated group level.
  • The cumulative impact (on top of Basel III and national rules) remains a major concern, especially in the context of the still fragile economic recovery.
  • Additional capital cannot be the only answer. Improved risk management practices and governance are central to systemic risk prevention.
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GFMA (AFME/ASIFMA/SIFMA) - August 26, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 26, 2011

Summary of concerns as noted in the comment letter:

  • Benefits of surcharge are not demonstrated to exceed costs of reduced economic growth.
  • The amount of the proposed surcharge is not justified.
  • The “cliff effect” of the proposed surcharge is also not justified and should be adjusted.
  • There should be clear and well defined offsets for improvements in orderly resolution regimes.
  • The lack of transparency in the test undercuts its usefulness both to GSIBs to reduce risk and to markets to monitor risk-taking.
  • Clear problems with the indicator-based measurement approach should be addressed.
  • Going concern contingent capital should be allowed as part of the surcharge.

Each of these concerns is discussed in more detail in the letter.

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Goldman Sachs - August 26, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 26, 2011 Summary of points from the comment letter:

  • Goldman Sachs supports the use of a sliding scale which requires increasing levels of loss-absorbent capital depending on the systemic importance if the institution.
  • Goldman would like more transparency on the criteria used to determine systemic importance (i.e. the "scorecard").
  • The company is concerned that the application of the G-SIB surcharge may exacerbate inconsistencies that already exist in banks' risk weighted average calculations.
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Investment Company Institute - August 26, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 26, 2011

From the comment letter:

"While the proposed indicator-based measurement approach is intended specifically to apply to banks, this initiative resembles in some respects an ongoing effort by U.S. financial regulators to design a process for assessing the systemic importance of certain nonbank financial institutions. More specifically, the Financial Stability Oversight Council (“FSOC”) has been working to develop and refine the analytical framework under which it will exercise its statutory authority to designate certain systemically important nonbank financial companies for heightened regulation and consolidated supervision by the Federal Reserve Board."

The letter also makes reference to two studies conducted by the U.S. Financial Stability Oversight Council.

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Japanese Bankers Association - August 26, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 26, 2011

From the comment letter:

  • The JBA strongly supports setting multiple indicator-based measurements and bucketing approaches and implementing these in stages. The introduction of uniform surcharges with no regard to differences in individual banks’ risk profiles and other factors should be avoided.
  • The JBA believes the risks caused by global systematically important banks (G-SIBs) can be alleviated not only by capital surcharges, but also by locally established frameworks such as deposit insurance or other bankruptcy resolution legal systems and lending limits. In accordance with the levels of various regulations and systems and characteristics of business models in different countries, qualitative assessments by local authorities should be seriously respected.
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Royal Bank of Scotland - August 26, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 26, 2011

Summary of key points from the comment letter:

  • RBS is unconvinced that the case for additional capital for G-SIBs has been proven.
  • Designation as a systemic bank increases the risk of moral hazard and competitive distortions.
  • The analysis that has been provided also seems quite light on detail and so we urge that no final decisions be made before the Committee and the industry have reviewed and discussed the impacts.
  • Given that restrictions on distributions are set at a high level (40%) even at the upper reaches of the buffer, this will effectively become a hard limit which, in practice, will oblige banks to hold a substantial management buffer above this, compounding wider economic effects and unintended consequences. The restrictions could also impede management from implementing recovery actions in a stress situation and restrict regulators’ freedom of action.
  • We favour inclusion of Contingent Capital (CoCo) instruments in the G-SIB buffer as these provide banks with greater flexibility and we argue that some of the arguments against this in the consultative paper are overstated.
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UBS - August 26, 2011

Consultative Document: Globally systemically important banks: Assessment methodology and the additional loss absorbency requirement
August 26, 2011

The comment letter requests:

  • Clarification of the cross-jurisdictional treatment of measures to insure the avoidance of "double-counting;"
  • Review of methodology on a regular basis and benchmarking against international standards;
  • Alternative capital instruments should not focus solely on contingent capital ("CoCos"), especially given the limitations of CoCos - explained in the letter.

The letter includes an appendix on specific accounting/presentation differences across jurisdictions.

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References

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