US Treasury takes aim at post-crisis regulation in Trump-ordered review
13 June 2017 Washington DC
Image: Shutterstock
The US Treasury has called on regulators to rationalise and improve the risk-based capital regime for the securities lending and derivatives exposures of US banks, in response to President Donald Trump鈥檚 executive order demanding their regulatory burden be eased.
In the first of a series of reports to be issued on its work to address 鈥渞edundancy, fragmentation, and inefficiency鈥�, the Treasury outlined on 12 June 鈥渃hanges that can be immediately undertaken to provide much-needed relief鈥�.
Trump ordered a review of post-financial crisis regulation earlier this year, with a view to rolling back rules that have adversely affected profitability.
The appropriateness of the existing methodologies and calibrations around the single-counterparty credit limit (SCCL), which comes under the umbrella of the Basel III framework, were called into question as they do not account for business activities such as securities lending.
The Treasury said regulators should work to "reduce redundant calculation approaches and improving risk sensitivity" in the measurement of securities financing activities, which would would be disproportionately penalised under the current rules.
It was also recommended that the SCCL should only apply to banks that are subject to the revised threshold for the application of the enhanced prudential standards.
The long list of proposed amendments to post-financial crisis banking regulation also included a recommendation to considerably narrow the scope of application of the liquidity coverage ratio (LCR) to include only internationally active banks.
The Treasury suggested that the degree of conservatism in the cash flow calculations methodologies and other aspects of the LCR process should be adjusted to include a greater reliance on a banking organisation鈥檚 historical experience.
In order to further boost market liquidity, the Treasury recommended delaying the domestic implementation of the net stable funding ratio (NSFR) and the fundamental review of the trading book (FRTB) rules until they can be appropriately calibrated and assessed.
鈥淏oth of these standards represent additional regulatory burden and would introduce potentially unnecessary capital and liquidity requirements on top of existing capital and liquidity requirements.鈥�
The use of a stricter definition of high-quality liquid assets to bring it in line with the LCR was also recommended.
The Volcker Rule, which is already under serious threat of being scrapped from potential Dodd-Frank replacement the Financial CHOICE Act, 鈥渞equires substantial amendment鈥�, according to the Treasury.
鈥淚ts implementation has hindered market-making functions necessary to ensure a healthy level of market liquidity. Combined with high liquid asset buffers, and limited time to restore buffers during periods of stress, the Volcker Rule could result in pro-cyclical behaviour and reinforce market volatility during periods of stress,鈥� the treasury added.
The Treasury and the White House will now begin working with Congress and industry stakeholders to implement the recommendations advocated in the report.
Subsequent reports will be issued over the coming months, which will focus on markets, liquidity, central clearing, financial products, asset management, insurance, and innovation, among other areas.
Treasury secretary Steven Mnuchin said: 鈥淧roperly structuring regulation of the US financial system is critical to achieve the administration鈥檚 goal of sustained economic growth and to create opportunities for all Americans to benefit from a stronger economy.鈥�
鈥淲e are focused on encouraging a market environment where consumers have more choices, access to capital and safe loan products鈥搘hile ensuring taxpayer-funded bailouts are truly a thing of the past.鈥�
Commenting on the Treasury鈥檚 report, Kenneth Bentsen, president and CEO of the Securities Industry and Financial Markets Association, said: 鈥淲e commend secretary Mnuchin and the treasury department staff for conducting a thorough review of our financial regulatory system. The US has implemented hundreds of regulations since the financial crisis鈥攕upplementing an already expansive regulatory framework established throughout the prior century.鈥�
In the first of a series of reports to be issued on its work to address 鈥渞edundancy, fragmentation, and inefficiency鈥�, the Treasury outlined on 12 June 鈥渃hanges that can be immediately undertaken to provide much-needed relief鈥�.
Trump ordered a review of post-financial crisis regulation earlier this year, with a view to rolling back rules that have adversely affected profitability.
The appropriateness of the existing methodologies and calibrations around the single-counterparty credit limit (SCCL), which comes under the umbrella of the Basel III framework, were called into question as they do not account for business activities such as securities lending.
The Treasury said regulators should work to "reduce redundant calculation approaches and improving risk sensitivity" in the measurement of securities financing activities, which would would be disproportionately penalised under the current rules.
It was also recommended that the SCCL should only apply to banks that are subject to the revised threshold for the application of the enhanced prudential standards.
The long list of proposed amendments to post-financial crisis banking regulation also included a recommendation to considerably narrow the scope of application of the liquidity coverage ratio (LCR) to include only internationally active banks.
The Treasury suggested that the degree of conservatism in the cash flow calculations methodologies and other aspects of the LCR process should be adjusted to include a greater reliance on a banking organisation鈥檚 historical experience.
In order to further boost market liquidity, the Treasury recommended delaying the domestic implementation of the net stable funding ratio (NSFR) and the fundamental review of the trading book (FRTB) rules until they can be appropriately calibrated and assessed.
鈥淏oth of these standards represent additional regulatory burden and would introduce potentially unnecessary capital and liquidity requirements on top of existing capital and liquidity requirements.鈥�
The use of a stricter definition of high-quality liquid assets to bring it in line with the LCR was also recommended.
The Volcker Rule, which is already under serious threat of being scrapped from potential Dodd-Frank replacement the Financial CHOICE Act, 鈥渞equires substantial amendment鈥�, according to the Treasury.
鈥淚ts implementation has hindered market-making functions necessary to ensure a healthy level of market liquidity. Combined with high liquid asset buffers, and limited time to restore buffers during periods of stress, the Volcker Rule could result in pro-cyclical behaviour and reinforce market volatility during periods of stress,鈥� the treasury added.
The Treasury and the White House will now begin working with Congress and industry stakeholders to implement the recommendations advocated in the report.
Subsequent reports will be issued over the coming months, which will focus on markets, liquidity, central clearing, financial products, asset management, insurance, and innovation, among other areas.
Treasury secretary Steven Mnuchin said: 鈥淧roperly structuring regulation of the US financial system is critical to achieve the administration鈥檚 goal of sustained economic growth and to create opportunities for all Americans to benefit from a stronger economy.鈥�
鈥淲e are focused on encouraging a market environment where consumers have more choices, access to capital and safe loan products鈥搘hile ensuring taxpayer-funded bailouts are truly a thing of the past.鈥�
Commenting on the Treasury鈥檚 report, Kenneth Bentsen, president and CEO of the Securities Industry and Financial Markets Association, said: 鈥淲e commend secretary Mnuchin and the treasury department staff for conducting a thorough review of our financial regulatory system. The US has implemented hundreds of regulations since the financial crisis鈥攕upplementing an already expansive regulatory framework established throughout the prior century.鈥�
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