Regulators taking another
look at costs of Wall Street safety rule
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[October 24, 2016]
By Patrick Rucker and Jonathan Spicer
WASHINGTON/NEW
YORK (Reuters) - Just as memories of the financial crisis are fading and
tough new banking regulations are beginning to bite, some current and
former regulators wonder whether one of the rules is too much of a
burden for markets and taxpayers.
At issue is the requirement that the largest U.S. banks set aside $6 of
capital for every $100 of assets on their books - double what they had
to hold before.
Because this so-called Supplementary Leverage Ratio (SLR) rule applies
to all bank assets including Treasuries, it has made owning that
ultra-safe government debt and related trades more expensive.
Wall Street has complained about costs of many measures designed to make
the financial system safer, but regulators have been firm. However, when
banks argue that the SLR, which came into force early last year,
unnecessarily burdens short-term financing, current and former officials
say they may have a point.
"It has turned out to be quantitatively more of a problem than some
people had anticipated," said Jeremy Stein, who was a Fed governor when
the supplementary leverage ratio was adopted. Stein left the central
bank for Harvard University in 2014.
Any softening of the regulation could signal that, nearly a decade after
Wall Street's meltdown sparked a global recession, a safety-first
approach may be giving way to a more nuanced one where costs play a
greater role in regulators' considerations.
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Privately, some regulators are now asking themselves whether the cost of
complying with the rule may diminish its benefits, according to people
familiar with internal discussions. The Federal Reserve and other
central banks are analyzing the rule and its impacts.
The Fed and other U.S. bank supervisors acknowledge that some short-term
lending has disappeared since the rule's introduction. They differ,
though, over how much SLR should be blamed and whether any adjustments
are needed.
New York Fed President William Dudley, whose branch of the Fed is
studying the effects of SLR, has pointed out that the rule has curbed
banks' repo funding, but like other regulators he has held back with
recommending changes.
SLR may come up as a topic on Monday when Dudley meets regulators from
the Securities and Exchange Commission, the U.S. Treasury and other
agencies along with senior bank and market officials to discuss the
health of the U.S. Treasury market.
SMALL CHANGE, BIG IMPACT
The rule's impact is most visible in the U.S. repo market, where
financial institutions and central banks park and borrow short-term
funds by agreeing to sell and buy back U.S. Treasuries. (Graphic:
http://tmsnrt.rs/2eg3boF)
Since banks are required to set aside the same percentage of capital
whether they lend to a car buyer or the U.S. government, holding
Treasuries became more expensive and prompted banks to scale back their
repo operations.
That has depressed volumes, which for large and mid-sized banks have
fallen to about $1.2 trillion in January 2016, from about $1.7 trillion
in January 2013, according to a New York Fed presentation.
Big players, such as Goldman Sachs & Co [GSGSC.UL], Citigroup Inc, Bank
of America Corp and JPMorgan Chase & Co are among those most affected.
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![](../images/102416pics/busine33.jpg)
People sit outside the New York Stock Exchange (NYSE) during the
morning commute in New York City, U.S., September 15, 2016.
REUTERS/Brendan McDermid - RTSNWHN
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Stanford University professor Darrell Duffie estimates in his research
that bid-ask spreads in repo markets have risen
four-fold over the last two years, reflecting rising trading costs for
hedge funds and others relative to money market funds.
The rule can also come at a cost to taxpayers.
In nearly two years big banks have had to set aside more capital for
holding government debt, Treasury yields have inched up. JPMorgan
estimates that higher interest payments will add up to $260 billion over
the next decade.
A group representing the world's major central banks and chaired by
Dudley is already examining how bank rules can hinder the trade of
government debt in key markets.
The Committee on the Global Financial System (CGFS), a subgroup of the
Bank for International Settlements in Basel, Switzerland, is expected to
issue its findings early next year, according to people familiar with
its work.
In August, the Bank of England eased its own reserve rules, excluding
cash and short term loans held at the bank and other assets from its
leverage calculation.
In the United States, advocates for leading Wall Street propose
exempting government bonds from the leverage rule, arguing they are far
safer than other assets. Some regulators say, however, that making such
an exemption would be unwise and may not be necessary. They argue that
other changes in money market rules and the Fed's own repo activities
may have caused changes in market trading.
"If you start carving out assets you are making value and political
judgments," Tom Hoenig, vice chairman of the Federal Deposit Insurance
Corporation and an outspoken advocate for strong capital standards, told
Reuters in an interview.
"A leverage ratio can only work if there are no exclusions."
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But Duffie told Reuters there was "a lot of second-guessing" among
regulators. "Most will say 'we wish we hadn't gone this far but we are
here and it's very difficult to modify the rule."
(Reporting By Patrick Rucker and Jonathan Spicer; editing by Linda Stern
and Tomasz Janowski)
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