H. Rept. 115-656 - PENSION, ENDOWMENT, AND MUTUAL FUND ACCESS TO BANKING ACT115th Congress (2017-2018)
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115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-656
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PENSION, ENDOWMENT, AND MUTUAL FUND ACCESS TO BANKING ACT
_______
April 26, 2018.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
ADDITIONAL VIEWS
[To accompany H.R. 2121]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 2121) to require the appropriate Federal banking
agencies to revise regulations to specify that certain funds
shall not be taken into account when calculating any
supplementary leverage ratio for custodial banks, and for other
purposes, having considered the same, report favorably thereon
with amendments and recommend that the bill as amended do pass.
The amendments are as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Pension, Endowment, and Mutual Fund
Access to Banking Act''.
SEC. 2. TREATMENT OF FUNDS DEPOSITED WITH A CENTRAL BANK IN CALCULATING
THE APPLICABLE SUPPLEMENTARY LEVERAGE RATIO.
(a) In General.--The funds of a custody bank that are deposited with
a central bank shall not be taken into account when calculating the
applicable supplementary leverage ratio for the custody bank.
(b) Limitations.--
(1) Amounts.--The amount of funds described under subsection
(a) shall be limited to--
(A) the total value of deposits of the custody bank
linked to fiduciary or custodial and safekeeping
accounts; or
(B) an amount that is greater than a percentage
specified by the appropriate Federal banking agency of
the total leverage exposure of the custody bank, based
on considerations such as the potential impact on the
safety and soundness of the custody bank and the
ability of the custody bank to continue to accept cash
deposits from customers that are linked to fiduciary or
custodial and safekeeping accounts.
(2) High-quality central bank requirements.--Subsection (a)
only applies to central banks that are high-quality central
banks, including--
(A) the Federal Reserve System;
(B) the European Central Bank; and
(C) central banks of member countries of the
Organisation for Economic Co-operation and Development,
if--
(i) the central bank of such member country
has been assigned a zero percent risk weight
under the final rules titled ``Regulatory
Capital Rules: Regulatory Capital,
Implementation of Basel III, Capital Adequacy,
Transition Provisions, Prompt Corrective
Action, Standardized Approach for Risk-weighted
Assets, Market Discipline and Disclosure
Requirements, Advanced Approaches Risk-Based
Capital Rule, and Market Risk Capital Rule''
(78 Fed. Reg. 62018; published Oct. 11, 2013,
and 79 Fed. Reg. 20754; published April 14,
2014); and
(ii) the sovereign debt of such member
country is not in default or has not been in
default during the previous five years.
(c) Regulations.--Not later than 60 days after the date of the
enactment of this Act, the appropriate Federal banking agencies shall
revise applicable regulations to carry out this Act.
(d) Definitions.--For purposes of this section:
(1) Appropriate federal banking agency.--The term
``appropriate Federal banking agency'' has the meaning given
that term under section 3 of the Federal Deposit Insurance Act
(12 U.S.C. 1813).
(2) Custody bank.--The term ``custody bank'' means a
depository institution holding company predominantly engaged in
custody, safekeeping, and asset servicing activities, including
any insured depository institution subsidiary of such a holding
company.
(3) Depository institution holding company.--The term
``depository institution holding company'' has the meaning
given that term under section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813).
(4) Insured depository institution.--The term ``insured
depository institution'' has the meaning given that term under
section 3 of the Federal Deposit Insurance Act (12 U.S.C.
1813).
(5) Supplementary leverage ratio.--The term ``supplementary
leverage ratio'' means the supplementary leverage ratio,
including applicable buffers, surcharges, and well-capitalized
requirements relating to such supplementary leverage ratio, as
defined by regulation of the appropriate Federal banking agency
in title 12, Code of Federal Regulations, as in effect on
October 1, 2017.
Amend the title so as to read:
A bill to ensure that certain funds shall not be taken into
account when calculating any supplementary leverage ratio for
custody banks, and for other purposes.
PURPOSE AND SUMMARY
Introduced by Congressman Keith Rothfus on April 25, 2017,
H.R. 2121, the ``Pension, Endowment, and Mutual Fund Access to
Banking Act'', would permit a custodial bank to exclude from
the calculations of its applicable supplementary leverage
ratio, subject to limitations, the funds deposited with a
``high-quality'' central bank. Within sixty days of enactment
of H.R. 2121, the federal banking regulators must update
``applicable regulations'' to account for the changes made by
the legislation.
BACKGROUND AND NEED FOR LEGISLATION
In response to the 2008 financial crisis, the Basel
Committee on Banking Supervision (Basel Committee) agreed to
modify internationally negotiated bank regulatory standards
known as the Basel Accords, to increase bank capital
requirements.
Basel III increased the minimum leverage ratio from 3
percent to 4 percent for certain banks, including those with a
strong supervisory rating. The leverage ratio is calculated
based on the value of a bank's assets without the use of risk-
weighting. On July 9, 2013, the federal banking regulators,
including the Federal Reserve, the Federal Deposit Insurance
Corporation, and the Office of the Comptroller of the Currency,
issued a final rule to implement many of the Basel III
recommendations.
In addition to the simple leverage ratio, Basel III
established a ``supplementary leverage ratio'' (SLR) that
requires certain larger banking organizations to maintain a 3
percent ratio of tier 1 capital to total leverage exposure. The
SLR includes leverage exposures that are both on and off asset
the bank's balance sheet. All banks with at least $250 billion
in total assets and $10 billion in foreign assets must meet a 3
percent SLR. In addition, banks with more than $700 billion in
assets or $10 trillion in assets under custody must maintain a
5 percent SLR to avoid restrictions on capital distributions
and discretionary bonuses, and 6 percent for depository
subsidiaries to be considered well capitalized.
In April 2014, federal banking regulators proposed and
adopted an ``enhanced supplementary leverage ratio'' (eSLR) for
the U.S. global systemically important banking organizations,
or ``U.S. G-SIBs,'' of 5 percent at the bank holding company
and 6 percent at each insured depository institution
subsidiary. Beginning in January 2018, banks subject to the
rules will be required to meet both the SLR and eSLR.
In June 2017, the Treasury Department released its first
report in response to the President's February 3, 2017
Executive Order entitled ``Core Principles for Regulating the
United States Financial System'' to inform the Administration's
perspective to regulate the financial system. The report
entitled, ``A Financial System That Creates Economic
Opportunities--Banks and Credit Unions'' provided
recommendations to improve market liquidity and rationalize
capital requirements. The report states that ``[s]ignificant
adjustments should be made to the calculation of the SLR. In
particular, deductions from the leverage exposure denominator
should be made, including . . . [c]ash on deposit with central
banks.''
H.R. 2121, as amended by an amendment offered by
Representative Bill Foster, allows a depository institution
holding company ``predominantly engaged in custody,
safekeeping, and asset servicing activities'' to exclude from
the calculations of its applicable supplementary leverage ratio
funds deposited with a ``high-quality'' central bank. So called
custodial banks provide asset safekeeping for large
institutional investors, asset managers, official institutions
and private wealth clients. Custody services involve the
holding and servicing of assets for others and custodians
provide administrative services for their clients such as the
processing of income and interest payments, proxy voting,
transfer agency services, securities lending and the redemption
of securities, among other activities.
Banks that have a predominant amount of businesses derived
from custodial services are different from banks that engage in
a wide variety of banking activities, as their revenues are
primarily derived from fees for custodial services as opposed
to net interest revenue generated from lending and other
interest-earning activities. In addition, custodial banks that
meet the definition of ``predominantly engaged in custody,
safekeeping, and asset servicing activities'' as required under
H.R. 2121 often deposit funds with high-quality central banks
or invest funds in other very low-risk assets. Based on the
publicly available data, and discussions with market
participants and with banks that provide custodial services,
the Committee believes that only the three traditional
custodial banks meet H.R. 2121's definition.
The difference in balance sheets associated custody banks
predominantly engaged in custodial services and those of
commercial banks was highlighted in a July 2016 white paper
published by the Clearing House, and entitled ``The Custody
Services of Banks'':
According to a report published by Autonomous, on an
asset-weighted average basis, net interest income
accounted for just under 60% of U.S. banks' revenues in
2014, with the percentage ranging from over 75% for
smaller regional banks (with total assets between $1
billion and $50 billion) and approximately 60% for
large regional banks (with total assets between $50
billion and $500 billion) to approximately 50% for
large banks (with total assets above $500 billion) . .
.
. . . In the four-year period from 2012 through 2015,
the percentage of total revenues accounted for by
revenues from custody services ranged from 64.1% to
69.2% for BNY Mellon, 51.4% to 53.8% for Northern
Trust, and 87.7% to 88.4% for State Street. The
majority of the revenues from custody services consist
of fees rather than net interest income, although, as
described below, custodians do earn net interest
income, which contributes to their overall
profitability.\1\
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\1\``The Custody Services of Banks,'' The Clearing House (July
2016), available at https://www.theclearinghouse.org/-/media/tch/
documents/research/articles/2016/07/
20160728_tch_white_paper_the_custody_services_of_banks.pdf?la=en.
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In a letter of support for H.R. 2121 dated October 10,
2017, the Financial Services Roundtable wrote:
Pension funds, mutual funds, and endowments depend on
custody banks for the day-to-day services that allow
individuals to build wealth and invest. The services
include recordkeeping to ensure that retirement
accounts, pension funds, and other assets are safe and
secure, and processing customers' asset sales and
purchases. The Supplementary Leverage Ratio (SLR)
required by banking regulators has a disproportionate
effect on custody banks because of their higher
proportion of safe assets, particularly cash at central
banks. H.R. 2121 will modify the SLR requirements for
these institutions and preserve their ability to place
customer cash on deposit at central banks.
In a letter of support for H.R. 2121 dated October 10,
2017, the Securities Industry and Financial Markets Association
wrote:
This technical correction is an important step to
improve the SLR to ensure that custody banks have
enough balance sheet capacity to provide clients with a
safe haven during stressed market conditions.
Accordingly, this legislative fix would improve custody
banks' abilities to service clients, reduce market
stress, and enhance financial stability.
HEARINGS
The Committee on Financial Services held hearings
discussing matters relating to H.R. 2121 on February 15, 2017
and July 12, 2017.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
October 12, 2017 and ordered H.R. 2121 to be reported favorably
to the House as amended by a recorded vote of 60 yeas to 0 nays
(Record vote no. FC-76), a quorum being present. Before the
motion to report was offered, the Committee adopted an
amendment in the nature of a substitute offered by Mr. Rothfus,
and the Committee adopted by voice vote an amendment to the
amendment in the nature of a substitute by Mr. Foster.
COMMITTEE VOTES
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House as amended. The motion
was agreed to by a recorded vote of 60 yeas to 0 nays (Record
vote no. FC-76), a quorum being present.
COMMITTEE OVERSIGHT FINDINGS
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
PERFORMANCE GOALS AND OBJECTIVES
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 2121
will remove burdensome, costly and unnecessary regulations from
custodial banks that were not originally intended for them by
providing for the Federal Reserve Board, the Federal Deposit
Insurance Corporation (FDIC), and the Office of the Comptroller
of the Currency (OCC) to specify that central bank placements
are excluded when calculating the applicable supplementary
leverage ratio for a custodial bank.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
CONGRESSIONAL BUDGET OFFICE ESTIMATES
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, February 23, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 2121, the Pension,
Endowment, and Mutual Fund Access to Banking Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Kathleen
Gramp and Sarah Puro.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 2121--Pension, Endowment, and Mutual Fund Access to Banking Act
Summary: H.R. 2121 would adjust the calculation of a
financial ratio called the supplementary leverage ratio (SLR),
for certain banks that engage predominately in banking
activities that the bill defines as custody, safekeeping, and
asset serving.\1\ The bill would permit certain large financial
institutions to omit cash balances held at the Federal Reserve
and other central banks from their SLR calculations. Currently,
all assets must be included in the denominator of that ratio.
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\1\The SLR is a capital-to-assets ratio that accounts for
derivatives and other commitments that are not typically included in a
bank's leverage ratio calculation.
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CBO estimates that enacting H.R. 2121 would increase
deficits by $45 million over the 2018-2027 period. That amount
includes a net increase in direct spending of $50 million and
an increase in revenues of $5 million. Most of those costs
would be recovered from financial institutions in years after
2027. Because enacting the bill would affect direct spending
and revenues, pay-as-you-go procedures apply.
CBO estimates that enacting H.R. 2121 would not increase
net direct spending or on-budget deficits by more than $2.5
billion in any of the four consecutive 10-year periods
beginning in 2028.
H.R. 2121 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA).
If the Federal Deposit Insurance Corporation (FDIC)
increases fees to offset some of the costs of implementing the
bill, H.R. 2121 would increase the cost of an existing mandate
on the depository and large financial institutions that are
required to pay those fees. Using information from the affected
agencies, CBO estimates that the incremental cost of the
mandate would fall well below the annual threshold for private-
sector mandates established in UMRA ($156 million in 2017,
adjusted annually for inflation).
Estimated cost to the Federal Government: The estimated
budgetary effect of H.R. 2121 is shown in the following table.
The costs of this legislation fall within budget function 370
(advancement of commerce).
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By fiscal year, in millions of dollars--
-----------------------------------------------------------------------------------------------------
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2018-2022 2018-2027
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INCREASES IN DIRECT SPENDING
Estimated Budget Authority........................ 0 3 5 7 7 6 6 5 5 6 22 50
Estimated Outlays................................. 0 3 5 7 7 6 6 5 5 6 22 50
INCREASES IN REVENUES
Estimated Revenues................................ 0 0 0 0 0 1 1 1 1 1 0 5
NET INCREASE IN THE DEFICIT FROM INCREASES IN DIRECT SPENDING AND REVENUES
Effect on the Deficit............................. 0 3 5 7 7 5 5 4 4 5 22 45
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Basis of estimate: The budgetary effects of H.R. 2121 stem
from a small increase in the chance that the FDIC would incur
additional costs to resolve failed financial institutions,
because of the change in the SLR, which could reduce the amount
of capital that a few banks hold. For this estimate, CBO
assumes that the bill will be enacted late in 2018.
CBO's estimate for H.R. 2121 is based on the analysis that
underlies projections for deposit insurance in its June 2017
baseline. Those projections incorporate the small probability
of a financial crisis in any given year within the projection
period and the more likely scenario of an average number of
bank and credit union failures in any given year. As a result,
the estimated cost of this legislation represents a weighted
probability of outcomes--including some cases for which the
probability is very low but for which the costs to the Deposit
Insurance Fund (DIF) or the Orderly Liquidation Fund (OLF) are
much larger. Both of those funds are administered by the
FDIC.\2\
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\2\The DIF resolves the assets of failed insured depository
institutions and insures certain deposits up to $250,000 per person. It
is funded by premiums paid by insured institutions. The OLF would
resolve failures of certain large, systemically important financial
institutions--including banks and nonbanks. In the event of such a
failure, costs to the OLF would be recouped by assessments on other
large financial institutions (which are recorded as revenues in the
budget).
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CBO estimates that the bill would effectively allow up to
five large financial institutions to omit their cash balances
held at the Federal Reserve and other central banks when
calculating the SLR. The bill's provisions could reduce the
capital that those institutions must hold relative to their
assets. The net effect of implementing the bill would vary
among eligible institutions because the SLR is only one measure
used by federal regulators to determine how much capital a bank
must hold. The net budgetary effects of implementing the bill
also would be different for the DIF and the OLF.
The number of financial institutions and the amount of
assets that could be affected depend on how the federal
financial regulators implement the bill. Specifically, H.R.
2121 stipulates that the change in the calculation of the SLR
would apply to banks that are ``predominately'' in the business
of custody services.\3\ CBO expects that the three traditional
custody banks in the United States--Bank of New York, State
Street, and Northern Trust--would clearly qualify for the SLR
adjustments authorized by the bill. Their combined assets were
about $720 billion in 2017. CBO estimates that regulators also
may determine that other institutions would be eligible for the
SLR adjustment if the value of their custodial activities is
similar to that of the three traditional custody banks. For
this estimate, CBO assumes that there is a 50 percent chance
that regulators would allow two other financial institutions--
JP Morgan and Citibank, with combined assets of $4.4 trillion--
to adjust their SLRs under the terms in the bill.\4\
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\3\Custody services include holding and servicing assets on behalf
of other clients. Custody services often are provided to large
institutional investors and private wealth clients and include the
settlement, holding, and reporting of customers' marketable securities
and cash.
\4\See The Clearing House, The Custody Services of Banks (July
2016), page 16, http://tinyurl.com/yat2wep7.
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Changes in the amount of capital that a bank holds can
affect its probability of failure, which in turn may affect
costs incurred by the DIF and the OLF.\5\ Costs to the DIF
would stem primarily from decreases in capital at JP Morgan and
Citibank because the three traditional custody banks hold few
insured deposits. In contrast, costs to the OLF would stem
primarily from decreases in capital at the three traditional
custody banks.
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\5\The academic literature suggests that a 1 percent decrease in
the capital-to-assets ratio for a bank can increase the probability of
failure by between 5 percent and 60 percent. CBO used a midpoint of
that range for this estimate.
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Based on publicly available information about the
components of bank balance sheets and on the loss and failure
rate estimates that underlie CBO's June 2017 baseline
projections, CBO estimates that over the 2018-2027 period,
implementing the bill would increase the deficit by $45
million, or by roughly 0.05 percent of the June baseline
projection for FDIC programs. That amount includes an increase
in direct spending of $50 million and an increase of revenues
of $5 million. CBO estimates that most of the costs would be
offset after 2027 by an increase in fees paid by financial
institutions.
Pay-as-You-Go considerations: The Statutory Pay-As-You-Go
Act of 2010 establishes budget-reporting and enforcement
procedures for legislation affecting direct spending or
revenues. The net changes in outlays and revenues that are
subject to those pay-as-you-go procedures are shown in the
following table.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 2121, THE PENSION, ENDOWMENT, AND MUTUAL FUND ACCESS TO BANKING ACT, AS ORDERED REPORTED BY THE HOUSE
COMMITTEE ON FINANCIAL SERVICES ON OCTOBER 12, 2017
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By fiscal year, in millions of dollars--
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2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2022 2018-2027
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NET INCREASE IN THE DEFICIT
Statutory Pay-As-You-Go Impact................................. 0 3 5 7 7 5 5 4 4 5 22 45
Memorandum:
Changes in Outlays........................................... 0 3 5 7 7 6 6 5 5 6 22 50
Changes in Revenues.......................................... 0 0 0 0 0 1 1 1 1 1 0 5
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Increase in long-term direct spending and deficits: CBO
estimates that enacting the legislation would not increase net
direct spending or on-budget deficits by more than $2.5 billion
in any of the four consecutive 10-year periods beginning in
2028.
Mandates: H.R. 2121 contains no intergovernmental mandates
as defined in UMRA.
If the FDIC increases premiums or fees to offset the costs
of implementing the bill, H.R. 2121 would increase the cost of
an existing mandate on the depository and large financial
institutions required to pay those fees. Using information from
the agencies, CBO estimates that the incremental cost of the
mandate would be below the annual threshold for private-sector
mandates established in UMRA ($156 million in 2017, adjusted
annually for inflation).
Estimate prepared by: Federal Costs: Kathleen Gramp and
Sarah Puro; Mandates: Rachel Austin.
Estimate approved by: H. Samuel Papenfuss, Deputy Assistant
Director for Budget Analysis.
FEDERAL MANDATES STATEMENT
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
DUPLICATION OF FEDERAL PROGRAMS
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
DISCLOSURE OF DIRECTED RULEMAKING
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed
rulemakings: The Committee estimates that the bill requires no
directed rulemakings within the meaning of such section.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title
This Section cites H.R. 2121 as the ``Pension, Endowment,
and Mutual Fund Access to Banking Act.''
Section 2. Treatment of funds deposited with a central bank in
calculating the applicable supplementary leverage ratio
This Section deems cash on deposit with a high-quality
central bank held by a custody bank excluded from the
denominator of the supplementary leverage ratio. Such funds are
limited to (a) the total value of deposits of the custody bank
linked to fiduciary or custodial and safekeeping accounts; and
(b) an amount that is greater than a percentage of the total
leverage exposure of the custodial bank, based on
considerations such as the potential impact on the safety and
soundness of the custodial bank and the ability of the
custodial bank to continue to accept cash deposits from
customers that are linked to fiduciary or custodial and
safekeeping accounts.
A high-quality central bank includes the U.S Federal
Reserve, the European Central Bank, or a central bank of a
member country of the Organization for Economic Co-operation
and Development (OECD) assigned a 0% risk weight under the U.S.
Basel III standardized approach capital rules, whose sovereign
debt is not in default, or has not been in default during the
previous five years.
CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
H.R. 2121 does not repeal or amend any section of a
statute. Therefore, the Office of Legislative Counsel did not
prepare the report contemplated by Clause 3(e)(1)(B) of rule
XIII of the House of Representatives.
ADDITIONAL VIEWS
One of the cornerstones of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank) was a mandate
that the largest, most complex financial institutions be
subject to enhanced prudential standards, including more
stringent capital requirements and leverage limits, to better
ensure safety and soundness and promote financial stability.
The 2008 financial crisis exposed many problems with our
financial regulatory framework, including an undercapitalized
banking system. With the enactment of Dodd-Frank and related
post-crisis regulatory developments, the largest U.S. banks
have subsequently increased their loss-absorbing common equity
capital by more than $700 billion, more than doubling their
common equity capital ratios from approximately 5 percent to
more than 12 percent.\1\ As a result of these reforms, the
financial system is much safer, which in turn has promoted
stable economic growth.
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\1\Federal Reserve Board Vice Chairman of Supervision Randal
Quarles, Testimony before the House Committee on Financial Services
hearing entitled ``Semi-Annual Testimony on the Federal Reserve's
Supervision and Regulation of the Financial System,'' (Apr 17, 2018),
https://financialservices.house.gov/uploadedfiles/hhrg-115-ba00-wstate-
rquarles-20180417.pdf.
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One example of such a reform is the implementation by U.S.
banking regulators--specifically the Board of Governors of the
Federal Reserve System (Federal Reserve Board), the Office of
the Comptroller of the Currency (OCC), and the Federal Deposit
Insurance Corporation (FDIC)--of the supplementary leverage
ratio (SLR) rule to ensure the largest banks don't become
overleveraged and fail in an economic downturn. However,
concerns have been raised with respect to how the SLR, in its
current form, is being applied to custodial banks. The three
largest custodial banks manage roughly $65 trillion in assets
for their customers, including pension funds, endowments and
other institutional investors,\2\ so they play an important
role in our financial system. In a future economic downturn or
financial crisis, institutional clients would likely liquidate
securities being held by custodial banks for cash, causing a
large and rapid influx of deposits into central banks. These
deposits receive a zero percent capital risk weight, but remain
subject to the SLR. Without some modification, the SLR could
force custodial banks to limit deposits or raise capital in the
midst of a crisis, making a bad situation worse.
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\2\See the U.S. Securities and Exchange Commission's (SEC's) 2016
Form 10-K for State Street Corp., available at http://
investors.statestreet.com/Cache/38179223.PDF?O=PDF&T;=&Y;=&D;=
&FID;=38179223&iid;=100447; the SEC's 2016 Form 10-K for The Bank of New
York Mellon Corp., available at https://www.bnymellon.com/_global-
assets/pdf/investor-relations/form-10-k-2016.pdf; the SEC's Form 10-K
for Northern Trust Corp., available at Northern Trust, ``2016 Annual
Report to Shareholders'' (2016), available at https://
www.northerntrust.com/documents/annual-reports/northern-trust-annual-
report-2016.pdf?bc=25199835.
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In testimony before Congress, former Federal Reserve Chair
Janet Yellen acknowledged the need to revisit the calibration
of the SLR.\3\ In August 2016, the Bank of England reversed
course and excluded money held at the central bank and loans of
up to three months from the calculation of a bank's leverage
ratio, and called on their foreign counterparts to adjust the
Basel III standards at the international level.\4\
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\3\House Committee on Financial Services hearing entitled
``Monetary Policy and the State of the Economy'' Wednesday, (July 12,
2017), https://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=402098. Also see Alistair Gray and Sam
Fleming, ``Yellen signals Fed may relax crisis-era bank safety rule,''
Financial Times, https://www.ft.com/content/elf5f0f4-6800-11e7-9a66-
93fb352balfe, and Former Governor Dan Tarullo, ``Departing Thoughts,''
remarks at the Woodrow Wilson School, Princeton University, (April 4,
2017), https://www.federalreserve.gov/newsevents/speech/
tarullo20170404a.htm.
\4\Huw Jones, ``Bank of England eases banks' capital leverage rule
to help support economy,'' Reuters (Aug. 4, 2016), http://
www.reuters.com/article/britain-boe-banks/bank-of-england-eases-banks-
capital-leverage-rule-to-help-support-economy-idUSL8N1AL40S.
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In the meantime, H.R. 2121, the Pension, Endowment, and
Mutual Fund Access to Banking Act, seeks to address issues with
the SLR's application to custodial banks. The bill would
require federal banking agencies to specify that funds of a
custodial bank that are deposited with a central bank generally
not be taken into account when calculating the applicable SLR
for a custodial bank. The exemption is limited to banks that
are predominantly engaged in custodial banking and the amount
of funds deposited linked to the bank's custodial and
safekeeping accounts. And because of an amendment offered by
Rep. Bill Foster during the Committee's consideration of H.R.
2121 that was unanimously adopted, the exemption is limited to
certain central banks, including the Federal Reserve and the
European Central Bank, and can be further limited by regulators
based on safety and soundness considerations.
A similar provision was included as section 402 in S. 2155,
the Economic Growth, Regulatory Relief, and Consumer Protection
Act, which was passed by the Senate in March 2018, however the
Senate provision lacks similar flexibility contained in H.R.
2121 with respect to the potential impact on the safety and
soundness of the custodial bank.
It is worth noting several developments that occurred after
the Committee's consideration of H.R. 2121 in October 2017 that
the House should consider prior to further action on the
legislation.
Scope of H.R. 2121 and CBO estimate
The Congressional Budget Office (CBO), in reviewing H.R.
2121 for budgetary scoring purposes following the Committee's
consideration, wrote that they expect, ``that the three
traditional custody banks in the United States--Bank of New
York, State Street, and Northern Trust--would clearly qualify
for the SLR adjustments authorized by the bill. Their combined
assets were about $720 billion in 2017. CBO estimates that
regulators also may determine that other institutions would be
eligible for the SLR adjustment if the value of their custodial
activities is similar to that of the three traditional custody
banks. For this estimate, CBO assumes that there is a 50
percent chance that regulators would allow two other financial
institutions--JP Morgan and Citibank, with combined assets of
$4.4 trillion--to adjust their SLRs under the terms in the
bill.''\5\ This is despite the fact that H.R. 2121 includes
clear language that limits the scope to ``a depository
institution holding company predominantly engaged in custody,
safekeeping, and asset servicing activities, including any
insured depository institution subsidiary of such a holding
company.''\6\ (emphasis added)
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\5\https://www.cbo.gov/system/files/115th-congress-2017-2018/
costestimate/hr2121.pdf.
\6\See subsection (d)(2).
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Despite CBO's estimation, there should be no mistake or
misinterpretation, it never was the intent, nor does the
legislation provide for expanding its application to large
universal banks like JPMorgan and Citibank that engage in a
wider variety of financial activities beyond custodial banking
compared to banks engaged predominantly in custodial banking
activities.
Basel Committee's December 2017 agreement
Furthermore, the Federal Reserve and other U.S. bank
regulators reached an agreement with their international
counterparts on the Basel Committee on Banking Supervision
(Basel Committee)\7\ in December 2017 to finalize the Basel III
capital framework.\8\ The agreement would allow individual
country's to provide more targeted flexibility for custodial
assets with more safeguards. In a summary document, the Basel
Committee wrote: ``The Committee has also agreed that
jurisdictions may exercise national discretion in periods of
exceptional macroeconomic circumstances to exempt central bank
reserves from the leverage ratio exposure measure on a
temporary basis. Jurisdictions that exercise this discretion
would be required to recalibrate the minimum leverage ratio
requirement commensurately to offset the impact of excluding
central bank reserves, and require their banks to disclose the
impact of this exemption on their leverage ratios.''\9\
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\7\The Federal Reserve Board, the Federal Reserve Bank of New York,
OCC and FDIC are U.S. members of the Basel Committee. See https://
www.bis.org/bcbs/membership.htm. It is worth noting at the time this
December 2017 agreement was reached, President Trump's appointees for
the Federal Reserve's Vice Chair of Supervision and the Comptroller of
the Currency were confirmed by the Senate and in place to participate
in the Basel Committee's deliberations.
\8\This has been referred by some as the Basel III ``end game.''
For more information, see https://www.bis.org/bcbs/publ/d424.htm and
https.//www.bbvaresearch.com/wp-content/uploads/2017/12/Watch-Basel-
IV.pdf.
\9\https://www.bis.org/bcbs/publ/d424_hlsummary.pdf at 10.
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Even without H.R. 2121, the U.S. banking regulators have
the authority to adjust SLR on their own to implement such a
change, and arguably the Basel Committee's recommendation is a
more narrowly tailored option. To that end, some experts have
made recommendations on streamlining various capital and
leverage requirements.\10\ Other experts have raised concerns
about any exemption from leverage rules,\11\ however, the
Center for American Progress has recommended a similarly
tailored solution that the Basel Committee recommended compared
to a broader statutory change.\12\
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\10\For example, see Robin Greenwood, Samuel G. Hanson, Jeremy C.
Stein, and Adi Sunderam, ``Strengthening and streamlining bank capital
regulation,'' https://www.brookings. edu/bpea-articles/strengthening-
and-streamlining-bank-capital-regulation/.
\11\For example, see letters commenting on Section 402 of S. 2215,
available at: https://www.banking.senate.gov/newsroom/mmority/what-
wall-street-reform-leaders-are-saying-about-s2155-the-dodd-frank-roll-
back-bill.
\12\CAP, ``Resisting Financial Deregulation,'' Dec. 4, 2017 at 14
and 15.
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New regulatory proposals to adjust capital leverage rules
In addition, the Federal Reserve Board has been
developing\13\ and recently released two proposals that would
make major changes to capital, stress testing and leverage
requirements for the largest U.S. banks. On April 10, 2018, the
Federal Reserve Board announced the first proposal, which would
simplify its capital rules for large banks and introduce a
``stress capital buffer,'' or SCB, which would in part
integrate the forward-looking stress test results with the
Fed's non-stress capital requirements.\14\ The second and more
pertinent proposal issued by the Federal Reserve Board, along
with the OCC, is a plan to substantially revise the current
enhanced supplementary leverage ratio (eSLR) that applies to
global systemically important banks (G-SIBs), including two
custodial banks.\15\
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\13\https://www.bloomberg.com/news/articles/2018-01-19/fed-said-to-
be-finishing-proposal-to-ease-up-on-bank-leverage and https://
www.bloomberg.com/news/articles/2018-02-01/deposit-shunning-banks-get-
big-break-as-u-s-eases-leverage-rule.
\14\https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20180410a.htm and https://www.federalreserve. gov/newsevents/
pressreleases/files/bcreg20180410a1.pdf.
\15\https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20180411a.htm.
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Currently, G-SIBs must maintain a supplementary leverage
ratio of more than 5 percent to avoid limitations on capital
distributions and certain discretionary bonus payments. The
insured depository institution subsidiaries of the G-SIBs must
maintain a supplementary leverage ratio of 6 percent to be
considered ``well capitalized'' under the agencies' prompt
corrective action framework. The proposal modifies these
minimum leverage ratios with a new calculation: 3 percent plus
half of each G-SIB's risk-based capital surcharge for both the
holding company and insured depository institution
subsidiaries. Arguably, this proposal implements the recent
Basel III end game agreement. According to the Fed, ``Taking
into account supervisory stress testing and existing capital
requirements, agency staff estimate that the proposed changes
would reduce the required amount of tier 1 capital for the
holding companies of these firms by approximately $400 million,
or approximately 0.04 percent in aggregate tier 1 capital.''
That said, this proposal received a dissenting vote from
Fed Governor Lael Brainard, the first such dissent since 2011
when former Governor Duke dissented from a proposal on
interchange fees.\16\ In a recent speech, Governor Brainard
said, ``At a time when valuations seem stretched and cyclical
pressures are building, I would be reluctant to see our large
banking institutions releasing the capital and liquidity
buffers that they have built so effectively over the past few
years, especially since credit growth and profitability in the
U.S. banking system are robust.''\17\
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\16\https://www.politicopro.com/financial-services/article/2018/04/
fed-occ-release-plan-to-ease-backup-capital-rule-for-biggest-banks-
477397.
\17\https://www.federalreserve.gov/newsevents/speech/
brainard20180403a.htm.
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The FDIC announced opposition to the Fed plan as well and
disputed the potential impact on capital requirements for the
largest banks. After the proposal was released, FDIC Chairman
Martin Gruenberg said, ``Strengthening leverage capital
requirements for the largest, most systemically important banks
in the United States was among the most important post crisis
reforms . . . . the amount of tier 1 capital required under the
proposed eSLR standard across the lead IDI subsidiaries would
be approximately $121 billion less than what is required under
the current eSLR standard to be considered well-
capitalized''\18\ (emphasis added). In a speech given before
the eSLR proposal was made public, FDIC Vice Chair Hoenig
raised similar concerns.\19\
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\18\https://www.americanbanker.com/news/fed-occ-back-proposal-to-
ease-big-bank-capital-measure.
\19\Hoenig said, ``[I]t concerns me that the U.S. regulatory
agencies have joined the recent Basel Committee agreement that,
according to some estimates, could remove as much as $145 billion of
capital from the eight largest banking firms. This is
counterproductive. As I noted earlier, the U.S. banking system is
stronger than that of any other region. Even with tangible equity at
only 6.62 percent of total assets plus the fair value of derivatives,
the market has come to rely most heavily on U.S. banks over their less
well-capitalized foreign peers. Also, U.S. bank stocks are trading at
premiums with an average price-to-book ratio of 1.4. In contrast,
foreign banks trade at an average ratio well below 1, a reflection of
their lower capital and poorly priced risks. Should the U.S. banking
agencies embrace the Basel standard, the reduction in private capital
would necessarily be underwritten by the FDIC, the Federal Reserve, and
then the taxpayer. As an example, one bank that received more than $100
billion dollars of capital and liquidity support in the last financial
crisis would be free to reduce its capital by 30 percent under the new
Basel accord. The United States should not engage in this race to the
bottom.'' Available at: https://www.fdic.gov/news/news/speeches/
spmar2818.html.
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In response to a request from Committee staff for more
information, the FDIC estimates the eSLR proposal would lower
capital requirements for the primary federally-insured bank
subsidiary of each G-SIB as follows:
JPMorgan Chase & Co.: $34.597 billion
(20.83% reduction in tier 1 capital)
Citigroup: $26.978 billion (23.3% reduction)
Bank of America: $22.838 billion (18.5%
reduction)
Wells Fargo: $20.406 billion (16.9%
reduction)
Bank of New York Mellon: $5.911 billion
(33.65% reduction)
State Street: $5.346 billion (37.5%
reduction)
Morgan Stanley: $2.507 billion (25%
reduction)
Goldman Sachs: $1.93 billion (9.49%
reduction)
These developments come despite the fact that Fed Chair
Powell recently said that the Fed's requirements for the
largest banks are ``very high and they're going to remain very
high,'' he said following a recent speech at the Economic Club
of Chicago.\20\ Chair Powell continued, ``As you look around
the world, U.S. banks are competing very, very successfully.
They're very profitable. They're earning good returns on
capital. Their stock prices are doing well. So I'm looking for
the case, for some kind of evidence that--and I'm open to
this--some kind of evidence that regulation is holding them
back, and I'm not really seeing that case as made at this
point.''\21\
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\20\https://www.federalreserve.gov/newsevents/speech/
powell20180406a.htm.
\21\Politico Pro, ``Powell doesn't see need to loosen rules on
biggest banks,'' April 6, 2018. Furthermore, while lowering the SLR
would reduce the likelihood of it serving as a binding constraint,
increasing risk-based capital rules would have the same effect. The
Federal Reserve Board's own research has indicated current capital
rules are on the lower end of requirements that best balances benefits
associated with mitigating systemic risk with a bank's funding costs
(see https://www.federalreserve.gov/econres/feds/files/2017034pap.pdf).
According to a 2017 farewell speech by former Fed Governor Tarullo, ``A
recent study by three Federal Reserve Board researchers concludes that
the tier 1 capital requirement that best achieves this balance is
somewhere in the range of 13 percent to 26 percent, depending on
reasonable choices made on some key assumptions. By this assessment,
current requirements for the largest U.S. firms are toward the lower
end of this range, even when one takes account of the de facto capital
buffers imposed on most firms in connection with the stress test.''
(See https://www.federalreserve.gov/newsevents/speech/
tarullo20170404a.htm). The Federal Reserve Bank of Minnesota recently
released an even more aggressive plan to increase capital and leverage
requirements, with Step 1 of their proposal requiring the largest banks
to issue common equity equal to 23.5 percent of risk-weighted assets
and a corresponding leverage ratio of 15 percent, with further
increases in capital required to eliminate a bank's systemic
importance. Their proposal also summarizes other relevant research on
appropriate capital and leverage requirements put forward by the Bank
for International Settlements, Financial Stability Board, Basel
Committee, Macroeconomic Assessment Group and the International
Monetary Fund (IMF) (see https://www.minneapolisfed.org/publications/
special-studies/endingtbtf).
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Conclusion
It is our view that H.R. 2121 is intended to deal with an
important, but narrow issue with respect to current leverage
rules and how they may limit custodial banks' ability to
respond to a sudden surge of deposits from pension funds and
other institutional investors in the event of a crisis. While
improvements to leverage and other prudential rules should be
considered, it is worth stressing that Dodd-Frank and the
enhanced prudential rules generally have strengthened the
resilience of the financial system and better protected
taxpayers and the U.S. economy from another costly crisis.
As regulators have issued new proposals to revise leverage
limits and other rules, it is clear U.S. banking regulators
possess the authority to make modifications to address these
issues without further legislation. However, these proposals go
well beyond addressing this particular issue regarding
custodial assets, and warrant further scrutiny by Congress.
It is critically important that an attempt to solve a
narrow problem does not result in a much more sweeping and
unintentional reduction of critical standards that would
undermine the safety and soundness of our largest financial
institutions. Such a result would be contrary to the intent of
H.R. 2121.
Maxine Waters.
Bill Foster.
[all]