Board of Governors of the Federal Reserve System

Today's proposal is intended to address a potential unintended consequence of our current capital framework. Specifically, the enhanced supplementary leverage ratio (eSLR) for global systemically important bank (G-SIB) holding companies may be over-calibrated in a manner that disincentivizes firms from participating in lower-risk, lower-return activities like Treasury market intermediation. In light of these and other concerns discussed in the proposal, I would have been inclined to support this proposal for comment if it was limited to changing the calculation for the eSLR for G-SIB holding companies. Unfortunately, however, I cannot support today's proposal because of its other elements.

The proposal would also reduce tier 1 capital requirements by 27 percent for the bank subsidiaries of G-SIBs. To justify this reduction, the proposal points once again to benefits to Treasury market intermediation. However, as the proposal emphasizes, broker-dealers, not banks, are the subsidiaries of the G-SIB organizations that play the most critical role in intermediating Treasury markets through market making and securities financing activities. Banks do not play the same role, and I am not convinced that the benefits to Treasury market intermediation from the change at the bank-level justify the significant proposed reductions in tier 1 capital requirements, especially in light of the potential for elevated financial stability risk.

Moreover, the proposal emphasizes that concerns about a significant reduction in capital requirements at the bank-level are mitigated by the fact that the capital would mostly remain trapped within the GSIB holding company due to consolidated holding company capital requirements. But banks are the subsidiaries within these holding companies that engage in maturity transformation related to the critical provision of deposits for households and businesses, and the emergence of significant strains at banks could trigger runs and systemic stress. If excess capital is positioned at a different subsidiary within the GSIB holding company, for example a foreign or domestic nonbank subsidiary, there is no guarantee that capital could or would be reallocated to the bank subsidiary when it is needed to avert, or mitigate the effects of, a run. This could result in larger losses to uninsured depositors and the Deposit Insurance Fund, and greater systemic risk.

Ultimately, I believe this reduction in capital requirements at the bank subsidiaries of the nation's largest and most complex banking organizations will increase systemic risk in a manner that is not justified by the benefits cited in the proposal.

I am also concerned about looking at this one aspect of capital requirements alone at this juncture. It is difficult to assess the impact of the reduction in the eSLR without knowing what risk-based capital levels will ultimately be once Basel III endgame and stress testing-related changes are finalized. I would prefer to take a holistic approach to capital regulation, and to evaluate the costs and benefits of the proposed eSLR reduction, inclusive of any changes in risk-based capital requirements.

I appreciate the thought and work that has gone into this proposal. I remain open to supporting these modifications if changes are made to mitigate the concerns that I have articulated and would be pleased to work with my colleagues to do so. I look forward to reading the comments.