WASHINGTON — Former Federal Deposit Insurance Corp. Chairman Martin Gruenberg reiterated his opposition to proposed changes to the enhanced supplementary leverage ratio backed by the Federal Reserve and the Office of the Comptroller of the Currency.
Gruenberg, who now serves as a member of the FDIC board, said the proposed changes would make banks more vulnerable to “disruption and failure.” According to some estimates, the plan would lower the required capital held by "global systemically important banks" by $121 billion.
“[The changes] are not technical fixes,” Gruenberg said in a speech Thursday at the Peterson Institute for International Economics. “They would significantly weaken constraints on financial leverage in systemically important banks put in place in response to the crisis.”
Gruenberg rebutted two arguments made in support of the changes to the leverage ratio.
Some have argued that reducing the eSLR would no longer make it a binding constraint and would avoid discouraging low-risk activities. It has also been argued that lowering the ratio will make banks safer by making risk-based capital the binding constraint.
Gruenberg said a bank’s risk of failure depends on the risk profile of its assets and the capital it holds.
“Research on bank failures typically concludes that more capital reduces the risk of bank failure and vice versa,” Gruenberg said.
Gruenberg also criticized arguments that holding company capital requirements and the Fed’s Comprehensive Capital Analysis and Review will “essentially trap” capital at the holding company, saying that if the capital reduction is paid to the parent company in dividends or transferred to nonbank affiliates, it could be unavailable to absorb losses. He also said that CCAR is a discretionary process and does not provide enough certainty.
“I do not believe that anyone has previously envisioned the source of strength by the parent company being bolstered by lowering the capital requirement at the bank,” Gruenberg said. “In effect what is being proposed here is to significantly reduce the capital of the bank in order to serve the interests of the parent company and its affiliates.”
Gruenberg has been outspoken in his opposition after the Fed and the OCC issued a proposal in April to replace the 2% eSLR with a ratio made up of half of the bank’s applicable risk-based capital surcharge. Fed Gov. Lael Brainard also opposed the changes, but was outvoted by the other Fed board members.
In June, Jelena McWilliams, who was nominated by President Donald Trump, was sworn in to succeed Gruenberg as chairman of the FDIC. McWilliams has not yet indicated whether the FDIC will support the changes to eSLR under her leadership.
