Letter on Global Systemically Important Financial Institutions
The Honorable Ben Bernanke
The Board of Governors of the
Federal Reserve System
20th Street & Constitution Avenue, NW
Washington, DC 205551
Dear Chairman Bernanke:
The U.S. Chamber of Commerce, the world’s largest business federation represents the interest of more than three million businesses and organizations of every size, sector, and region. We would like to take this opportunity to thank you and the Federal Reserve System for your tireless efforts in seeing the American financial system through the crisis and its after-shocks. Your stewardship of the Federal Reserve System was vital to preventing the shut-down of the credit markets and placing the economy on the road to recovery.
Nevertheless, we write to you today to express our strong concerns over the possible imposition of capital surcharges upon Global Systemically Important Financial Institutions (“GSIFI’s”). We believe that appropriate capital requirements are necessary to avoid over-leveraging and allowing suitable levels of risk-taking needed to fuel growth and innovation within the overall economy. However, these proposed capital surcharges come in addition to the Volcker Rule, other Dodd-Frank provisions including derivatives regulation, resolution authority and systemic risk regulation, as well as other capital requirements could disrupt that balance placing American financial institutions at a competitive disadvantage. Such a competitive disadvantage may raise the cost of capital for all businesses, create a drag on economic growth, and endanger the ability of the American economy to create the over 20 million jobs needed over the next 10 years to recover from the financial crisis and return the United States to prosperous growth.
At a minimum, a study should be undertaken, both domestically and internationally, to ascertain the potential impacts of a capital surcharge upon the financial system and economy as a whole before any proposals are implemented.
In November, 2008, the Chamber released principles for regulatory reform that included a section on capital and liquidity standards stating:
[e]xtreme leverage is an issue that demands regulatory focus, given repercussions during periods of stress in our financial markets. Capital and liquidity requirements will need to be established for all significant financial institutions that can have an impact on the stability of our capital and financial markets. These requirements should encourage meaningful prudence taking into account the firm’s risk profile, while permitting critically necessary innovation and thoughtful risk-taking.
Furthermore, in opposing the Volcker Rule ban on proprietary trading, during the debate of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘the Dodd-Frank Act”), the Chamber stated that the use of adequate capital standards was a pro-growth tool to address concerns of inappropriate risk taking, rather than a unilateral prohibition of generally accepted business practices. The Dodd-Frank Act allowed for a series of other wide-ranging powers to address inappropriate levels of risk including periodic stress tests, ability to impose higher capital standards, etc.
Therefore, the Dodd-Frank Act places both higher capital standards and the Volcker Rule ban on proprietary trading upon American financial services firms.
The Dodd-Frank Act in some respects puts American financial institutions at a competitive disadvantage. All of the other major economies have rejected any imposition of the Volcker Rule. While the United States did not fully implement Basel II, American capital standards have tended, historically, to be tougher than the norm globally and the Dodd-Frank Act will allow financial regulators to make the capital standards tougher than anywhere else around the world.
In effect, we have created a system where our largest financial institutions, domestically, will not resemble what a full service financial firm will look like in other parts of the world. This is not a matter of a race for the bottom, but rather that domestic customers may not have the same access to forms of capital that other global actors may.
Therefore, American GSIFI’s will face an array of regulatory tools and procedures to prevent inappropriate risk taking, that their global competitors may not, while not being able to engage in activities that other global firms may.
In such an atmosphere, the imposition of a GSIFI capital surcharge on American financial institutions may place them at a further economic disadvantage, create a drag on our financial services sector, and raise the costs of capital for businesses. These unintended consequences could have ramifications throughout the rest of the economy. An underperforming financial sector will make it more difficult for businesses to raise capital in an increasingly competitive global economy, adversely affecting economic growth and job creation. We believe that the impacts of a GSIFI’s capital surcharge, upon the financial system and economy, should be studied before any proposals are implemented.
Thank you for the consideration of these views. We look forward to an on-going dialogue with you and your staff to help address these issues and others that involve the extension of credit used by businesses to expand and create jobs.
Center for Capital Markets Competitiveness
U.S. Chamber of Commerce
Dr. Martin Regalia
Senior Vice President and Chief Economist
U.S. Chamber of Commerce