FOR IMMEDIATE RELEASE
CONTACT: Marcus Stanley
Americans for Financial Reform
202-466-3672 / jim@ourfinancialsecurity.org

Banking regulators today approved several important rules intended to improve the stability of the financial system. These included a re-proposal of rules on new margin protections for the derivatives markets and final rules related to bank capital and liquidity reserves. These rules represent progress in protecting financial stability and reducing the likelihood of another financial crisis. But overall, regulatory progress still falls well short of achieving the goal of addressing the problems revealed in the 2008 crisis and ending the problem of too-big-to-fail.

Our comments here are based on the summaries. The final text of the new rules has not yet been released – we look forward to reviewing the text in detail when it becomes available

1)      Re-proposal of margin rules: Margin is the first line of defense against disruptions in the $700 trillion global derivatives markets. This re-proposed rule includes a number of important steps forward in establishing margin protections for the substantial fraction of derivatives that are held by banks and not managed through central clearinghouses. We welcome these steps. However, based on the description of the cross-border provisions in the rule, we are concerned that these important margin requirements may not be properly applied to foreign subsidiaries of U.S. banks. These foreign subsidiaries are often vital to the stability of large Wall Street banks. The details of certain exemptions included in the rule will also be very important to its effectiveness.

2)      Final liquidity rules: With the approval of this rule, U.S. regulators for the first time have established a formal requirement for banks to hold liquidity reserves to help ensure that they can pay their financial obligations. Since failures in liquidity were central to the 2008 financial crisis, this is an important regulatory step. The final liquidity rule appears to maintain many of the strengths and weaknesses of the proposed rule, which we discussed in AFR’s comment on the proposed rule. However, the rule has apparently been weakened in its application to banks between $50 and $250 billion in assets, which are smaller than the largest ‘too big to fail’ Wall Street banks but are still major banking entities that hold a substantial amount of banking system assets. The definition of ‘high quality liquid assets’, already problematic in the proposed rule, has also been weakened.

As AFR stated in its comment on the proposed rule, additional rules on longer-term liquidity and other steps to address short-term funding markets will still be necessary to address stability risks. In addition, we support the expressed desire by regulators to consider the inclusion of some municipal securities in their liquid asset definition. Given that regulators have already approved a broad and possibly excessive range of securities in their definition of liquid assets, this would certainly be reasonable.

3)      Leverage ratio denominator: This rule is crucial in determining whether new capital rules will be effective. It is important that the strengths highlighted in AFR’s comment on the proposed rule are maintained in the final rule.