“A reproposal by only one agency would be unprecedented, creating confusion and raising many practical and It’s going to lead to legal issues,” Hill said. “For example, under such a scenario, if the final rule is challenged and the court determines that the final rule does not develop logically from the original proposal, the court would strike down the FDIC and OCC rules. But will it uphold the Federal Reserve rules?”
Amanda Andrade Rose/Bloomberg
WASHINGTON — Federal Deposit Insurance Corporation Vice Chairman Travis Hill joined a chorus of banking industry allies Wednesday to repropose and draft final Basel III capital standards for the three major federal banking institutions. We asked for further feedback on the changes made.
In remarks Wednesday afternoon at the American Enterprise Institute, Hill said any such reproposal should be pursued jointly by all three agencies, and if industry and other stakeholders seek input. He emphasized the need for an additional comment period.
“A reproposal by only one agency would be unprecedented, creating confusion and raising many practical and It’s going to lead to legal issues,” Hill said. “For example, under such a scenario, if the final rule is challenged and the court determines that the final rule does not develop logically from the original proposal, the court would strike down the FDIC and OCC rules. But will it uphold the Federal Reserve rules?”
As a member of the FDIC board, Mr. Hill voted against issuance of the proposal because the regulator was concerned about banks’ capital requirements and the amount of cash they must set aside in parallel with borrowed assets to fund lending activities. This can have a dramatic impact on how the amount of borrowed funds is calculated.
Mr. Hill’s call follows similar calls from various other top banking regulators, including Federal Reserve Chairman Jerome Powell, who said last week that a reproposal was “essential.” Hill and other industry allies argue that the potential rule changes are far-reaching and significant and require a complete reproposal.
Fellow Republican FDIC board member Jonathan McKernan called for a general re-proposal, but did not say which parts he wanted to re-propose.
Ian Katz, managing director at Capital Alpha Partners, said there would likely be a further comment period, but regulators could take half-hearted steps to avoid going completely back to square one. He pointed out that there is a gender.
“The Fed could come out with something that basically looks like a reproposal, but with a different name, and that would allow the public to comment without starting the process from scratch,” Katz said in June. ” he said. “If the Fed does that in the fall before the election, it could finalize the late Basel rules next year, perhaps in the first half.”
Hill, like other Basel skeptics, focused much of his anger on proposals to reform operational risk capital treatment. The first draft of the final Basel proposal calls for banks to base their capital requirements on business volume and past operating losses, and to move to using a standardized approach rather than banks’ internal models.
Along with reforms to market risk capital treatments, Hill said these frameworks are “based on a complex set of formulas and indicators that can be evaluated in a broad, substantive and rational manner without additional feedback.” It’s difficult to fix.”
Hill also said he believes brokered deposit regulations are outdated. Unlike traditional deposits, brokered deposits (also known as “hot money”) move from bank to bank in search of higher returns while maximizing deposit insurance coverage.
Banks like these deposits because they can quickly raise large sums of money in times of crisis, but such amounts are not available to traditional individuals, especially if brokers find better deals elsewhere and exit en masse. May be less reliable than deposits. Skeptics of brokered deposits argue that brokered deposits lead to increased interest rate sensitivity, liquidity risk, and asset-liability mismatch.
In response to the savings and loan crisis of the 1980s, Congress passed legislation governing brokered deposits in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The law prohibited undercapitalized banks from accepting brokered deposits and limited the interest rates banks could offer on brokered deposits.
Former FDIC Chair Elena McWilliams and Hill (who served as one of the top vice chairs during her tenure) developed and finalized the FDIC rules for brokered deposits in 2020. Part of President Trump’s rationale for the FDIC revision was to acknowledge that certain arrangements have traditionally been in place. If it is considered a brokered deposit, there may be less flight risk. For example, exclusive deposit-taking arrangements between fintech companies and banks are often less dependent on maximizing deposit returns and therefore should not be regulated in the same way as traditional brokered deposits. they argued.
Critics of the rule argue that it creates a loophole in the definition of deposit brokers and brokered deposits. The rule narrows the definition of intermediaries in brokered deposit arrangements and does not have the “primary purpose” of depositing deposits with a bank or credit union as long as the agent or asset manager deposits no more than 25% of the funds. Exempted agency activities. They manage for their customers.
Hill defended this rule, arguing that brokered deposits are inherently risk-free, pointing to the fact that other risks, such as lack of insurance, are the real root cause of these deposit risks. He noted that prior to the 2020 rule, the FDIC assessed compliance of new brokered deposit arrangements on a “one-time basis,” resulting in an unwieldy and opaque regime that was applied inconsistently across the industry. He pointed out that it had become.
Hill said he does not equate the risks posed by banks that rely heavily on traditional brokered deposits with the risks posed by companies that rely on retail deposits from a diverse network of branches, but he said regulators should consider how deposits are handled. He argued that it was necessary to think “comprehensively” about how to regulate the situation. modern bank.
“(While) some types of brokered deposits raise safety and soundness concerns…Traditional brokered deposits present the opposite concerns: the depositor has no relationship with the bank , the deposit has no franchise value because it earns a high interest rate, is fully insured, and usually cannot be withdrawn before maturity, so it is usually indifferent to the condition of the bank, but it is believed “It’s incredibly stable,” he said. “We would also like to consider discontinuing the use of the term ‘brokered deposits’ to refer to deposits that go beyond traditional brokered certificates of deposit.”
