I'm here to deliver the four-minute warning. Not really. Let's get started. Good morning to everyone and welcome to the Federal Reserve Board. I'm very pleased, though not surprised, to see such great interest in the topic of today's conference, the integrated review of the capital framework for large banks. And I want to thank Vice Chair for Supervision Bowman for having the great idea of holding this event at the outset of her term. I'd also like to thank Fed staff for their tireless work in putting the conference together.

So today we'll hear the perspectives of industry veterans, academics, and current and former policymakers who are all well-versed in the operations of large banks and the main pillars of the capital framework. A great benefit of this conference is the chance to consider all elements of the capital framework in concert rather than look at each in isolation. We need to ensure that all the different pieces of the capital framework work together effectively. Doing so will help maintain a safe, sound, and efficient banking system for the benefit of the people we serve.

The US bank capital framework includes risk-based capital requirements, leverage requirements, the surcharge for the largest and most complex banks, and the stress tests. We will discuss the status of each of those elements and the road ahead in a comprehensive manner. Today, as this audience will know well, we have proposals outstanding or in the works across all four areas. Our regulatory capital framework and all banking rules are implemented through supervision, an area where Vice Chair for Supervision Bowman brings deep experience as a former banker and state supervisor. As she has noted, we need to make sure that our supervisory practices focus on the critical areas that determine safety and soundness. We need our large banks to be well capitalized and to manage their key risks well. And we need large banks to be free to compete with one another, with non-bank financial institutions, and with banks in other jurisdictions to provide capital and support economic growth. The Fed is a dynamic institution. We're open to hearing new ideas and feedback on how to improve the capital framework for large banks. And I look forward to hearing from today's participants. Thanks again to all of you for joining us today. Thank you.

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All right. Thank you so much, Chair Powell. Uh, welcome everyone. My name is Amalvedia. I'm sure I've been inundating your email box with uh Capital Conference 2025 emails for registration and logistics. I will go over a couple of quick housekeeping things. Uh, and we will start the next panel at 9:00 a.m. As you know, this is a secure building, so our colleagues in law enforcement do ask that you keep your badges on you at all times. If you need to step out for a moment, anyone who you see that does not have a badge on is Federal Reserve staff. They are part of our events team supporting this great event. They're happy to escort you to a courtroom or step out to make a phone call. Uh, on that point, we do ask that you silence or put your cell phones uh on vibrate for the duration of this event. Uh, and with that said, we will get the next panel started at 9:00 a.m. Thanks so much.

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Ready to go. Good. Good morning everyone. Uh, before anything else, I want to thank Vice Chair Bowman for setting up this really engaging uh conference. We learned last night at dinner that this has all happened very quickly and that this is essentially an unprecedented uh type of conference for addressing uh uh proposals uh for new rulemaking. So this particular panel uh has been asked to address uh changes in the enhanced supplementary leverage ratio or ESLR and various other uh leverage ratio related capital requirements. In the notice of uh the proposal for rulemaking, the agencies have noted that this virtue of a simple and transparent rule has some unintended adverse consequences. The focus of which in the agency's uh proposal is the implications for uh intermediation in the US Treasury market. Uh so what the plan uh for this panel is that I'm going to ask some questions to the panelists who I'm going to introduce in a moment uh that we have teed up in advance. Uh but in order to keep it lively and engaging, I'm going to get some candid uh reactions across the panel to each other's comments and then I'm going to turn it over to you all uh for questions and answers. So uh prepare your uh thoughts and give us some uh challenging and uh useful questions please.

Uh, so to introduce uh the panel, to my immediate left is Tiffany Ang. Tiffany is the global treasurer of BNY, a financial services company and primary settlement provider for the US Treasury market. Tiffany is a former OCC regulatory attorney. Uh, to Tiffany's left is Don Kohn, whom everybody knows, senior fellow at Brookings. Don is a former vice chair of the Federal Reserve Board and former member of the Financial Policy Committee of the Bank of England. To Don's left is Brian Montalegro. Brian is head of global investment grade credit research and senior bank analyst at Vanguard. Prior to Vanguard, Brian was a top-ranked credit analyst on the sell side covering global financials for 20 years. And to Brian's left, Hal Scott, emeritus professor, Harvard Law School. Hal is also adjunct professor at Harvard Kennedy School and director of the Committee on Capital Markets Regulation. And finally, to the far left is Ben Weiner, partner in Sullivan and Cromwell's financial services and capital markets groups. Ben advises banking organizations on regulatory capital, stress testing, resolution planning, and capital market transactions.

So I'm going to ask Hal uh to set us off on first principles. Why do we actually have a leverage ratio rule and what is the history of this requirement? Do we actually need a leverage ratio rule and does the backstop rationale for that rule still apply today? Hal, >> Thank you, Garrett, and the organizers of this conference. Um, the leverage ratio sets, as you know, a minimum, sorry, the leverage ratio sets, as you know, a minimum a minimum capital level for banks based on its total value of its assets regardless of the riskiness of those assets. It operates in parallel with the risk-weighted standards which set separate minimums that do vary based on riskiness. The theory is that without a risk-insensitive leverage ratio, a bank might be free to expand its balance sheet by acquiring riskless assets without limit. But this is not a realistic model of how banks operate. Banks seek to employ capital to the highest returning activity. So what is the history of this requirement? The basic leverage ratio is not adopted, was not adopted in concert with the other aspects of our capital ratio regime, capital regime, as part of any integrated whole. It is a vestige of the pre-Basel era. So before Basel, all we had was a leverage requirement, and it was their uh finding fault with this leverage requirement that actually led us to risk-based capital. Um, so indeed, uh, with the introduction of Basel I's risk-weighted standards in 1989, most commentators argued that the leverage ratio should be dropped because having two separate sets of capital requirements would be duplicative and unnecessary, and the risk-based one was better than the old leverage one. And the agencies seriously considered doing away with the leverage ratio, but they ultimately chose to retain it. They were not confident in the accuracy of the novel and untested then risk weightings. Uh, and at the time, risk-weighted standards only accounted for credit risk, not market, operational, or interest rate risk, which was also an important part of thinking about bank capital. But we're far along now in the process. Here we are in 2025, and risk-weighted standards have evolved during this period of time. They have since their beginning been supplemented to incorporate market risk and operational risk, and now incorporate complex modeling that did not exist at the time of Basel I. Moreover, interest rate risk is continually monitored by bank examiners as part of the supervisory framework and could be incorporated into risk-based capital if you wanted to do that. We also have several other safeguards in the capital framework that did not exist at that time, like stress, stress testing regime. So there are strong arguments that the concerns that motivated the retention of the leverage ratio have been mitigated by subsequent enhancements and refinement of the overall capital framework. The leverage ratio is now a frequently binding requirement for the largest institutions, meaning that it requires more capital than the risk-weighted standards. This is inconsistent with the agency's original rationale for retaining the leverage ratio, which was that it would sort of be a backup for the insufficiency of the risk-weighted requirements. Um, bank capital levels, come to conclusion here, um, are at all-time highs now, well above what Basel and other jurisdictions required. I think we need to step back at this point, which is the whole purpose of this conference, and ask ourselves with respect to the leverage ratio, not only focus on ESLR, but whether we need it at all. Thank you.

>> Thanks. Uh, does anyone want to react? What about the uh issue of intersecting uh types of capital requirements? Does that cause problems when different banks are subject to different rules at different times? Any views on the panel?

Well, I can offer two observations about the role of the leverage ratio in the broader framework. Um, one is just, I know this conference is primarily focused on large banks, but we do have the community bank leverage ratio for smaller community banks. So there can be benefits in having a leverage ratio for particular institutions. They could have a simpler framework. But I think also the fact that the leverage ratio is itself simple also illustrates one of its potential benefits. We've seen in stress periods, there's often a focus on simplified metrics. That was certainly the case during the financial crisis to some extent. It was also the case during 2023. It wasn't necessarily the leverage ratio that was a focus, but there was a focus on things, metrics such as tangible common equity or others that are simple. So the simplicity of the leverage ratio, if it's properly designed and calibrated, could play a complimentary role both for smaller banking organizations if they want to have a simpler framework versus the complexity of calculating risk-weighted assets, um, but also more generally to have a component of the capital framework that, sort of, the benefit of it is its simplicity, particularly in times of stress.

There's also the issue of assets that uh turn out to be more risky than than they modeled to be, and this is a backstop for that. So the obvious example from history is AAA subprime mortgage tranches, which weren't really AAA, uh, but were modeled to be AAA and capital held against them, and it was a disaster.

Brian, I'd add the um, when you look at 2023, leverage requirements didn't necessarily catch the buildup in what seemed to be risk-free assets and some banks that ended up having trouble. So I think the important thing is, as as Ben said, properly calibrated, and it's difficult to perfectly calibrate a risk-based or a leverage requirement in in advance. So I think, you know, vigilance and staying on top of, you know, risk is ultimately the key. You can't just rely purely on, you know, either either of these. There's constantly new risks emerging, um, throughout. Something like CRTs, certainly growing in use, not very well, you know, not great disclosure around it. So just, I think staying on top of those risks as they come up is as important as where these are set.

So some support for the backstop uh principle. Tiffany?

If I can add to that, the leverage ratio is one piece of the puzzle. So banks are managing to capital, interest rate risk, liquidity, and all of those as part of a holistic risk framework is important. I think about stools on a table. Uh, each leg needs to be strong, and so to Brian's point about interest rate risk management, that individually also needs to be a robust leg to keep the entire table stable. But the leverage ratio itself can't overcompensate and make up for any weaknesses in other areas of risk management.

Did you want to react to anything? Any of the reactions to your comments?

No.

No. Okay. I sense a a degree of uh alignment on the panel on this. Okay. Tiffany, uh, you're the Treasury market expert.

Uh, and as I mentioned, uh, there's been a big focus uh on the unintended consequences uh for the Treasury market of this rule. So regulators have cited, in fact, in the proposal, Treasury market functioning as a key reason to recalibrate the leverage ratios. But is it better to lower the leverage ratios embedded in SLR or ESLR and the Tier 1 leverage ratios, or would it be better to have a more targeted fix to address Treasury market functioning, like exemptions?

Thank you, Darl. And let me kick off by thanking Vice Chair Bowman and the Federal Reserve for bringing us together today on this important topic. Let's spend a moment on Treasury market functioning. As a treasurer, that topic is so critical. We use Treasuries for liquidity management, collateral, hedging, and it's all linked to the Treasury market being the biggest, deepest, most liquid bond market in the world, stands at close to $30 trillion today, and growing. So supporting a resilient Treasury market is important for the broader financial system, which we're all invested in. There are two key tenets to that. One is safety, and another is liquidity. In terms of safety, there are a range of enhancements already in flight, including the central clearing mandate. In terms of liquidity, supporting and deepening the market for Treasury securities, which is growing, is critical. In our seat, knowing that a Treasury security can be converted to cash easily, quickly, and in all market environments is so important. And that's all predicated on an ecosystem of buyers, holders, sellers, intermediaries. And the intermediation of Treasuries is particularly important in periods of stress. At BNY, we have a unique vantage point into the Treasury market, and we do see elevated Treasury volumes in periods of market uncertainty or stress. In those periods, the market is operationally resilient, but we have seen periods of funding market pressures or dysfunction, and that tends to stem from an imbalance of buyers and sellers in the market. So it is exactly in those moments where having intermediaries who are ready, willing, able to support the Treasury market and the continued liquidity in the market is most critical. So that brings us to the topic here today, leverage reform. Leverage ratios across the supplemental leverage ratio as well as a Tier 1 leverage ratio in their current construct can disincentivize banks from intermediating Treasuries during those periods of stress, exactly when it's needed most. And another dimension to this is typically in those periods of volatility, there is also heightened balances, typically of cash or deposits on bank balance sheets. So banks' ability to act as a shock absorber for both cash and Treasury securities can be constrained by leverage ratios as they're constructed today. Now, the proposal offers solutions to that, and there are a couple of flavors to that, and there are considerations for each. One flavor is to lower the overall leverage requirement, and that does create extra capacity for banks. However, banks still have the discretion on how to use that capacity, and it may not be there in a period of stress. Another flavor is to specifically target cash and Treasury securities and exclude those particular assets from the leverage requirement. And in that case, it's a more direct support for Treasury intermediation and for banks to act as shock absorbers for cash in those periods of stress. Now, I'll posit that leverage reform is one facet of a multifaceted approach to support market liquidity. It really goes in harmony with public and private solutions, including government facilities such as the discount window and the standing repo facility, as well as private solutions, including recent innovations such as early morning repo or intraday repo. So taken together, as I take a step back as a treasurer, every day we're focused on resilience, and we're managing a range of risk measures, capital, liquidity, interest rate risk, just as I mentioned, and that's just to name a few. And we're thinking about a wide range of scenarios. We like to say, better to prepare rather than predict. If I extend that lens to reforms and having reforms that are also supporting resilient Treasury markets in a range of scenarios, knows that really leans towards taking a holistic, proactive approach, looking at all banks and targeting the risk at hand, and that'll help us target a future shock because we all know that no two stresses look exactly the same. And so with that, that holistic and proactive approach and discussion is exactly in the spirit of this dialogue today.

>> Thanks, Tiffany. Uh, this issue of uh exemptions uh for certain safe assets versus lowering of the of the leverage ratio number itself came up at our dinner table last night, and there was a range of views. But rather than trying to review those, I'd like to get the views of our panel. So, who, who, how, how about a quick run of the panel on whether exemptions in addition to or as an alternative to the proposal would be beneficial overall?

So, I, I, I would be concerned about exempting Treasuries because of the interest rate risk that could be encouraged. Banks could, would be encouraged, I think, to take, with just exempting Treasuries entirely. Now, I would, I'd like the alternative in the in the proposal for exempting Treasuries on the, in the dealer that are, on the dealer's books that are marked to market and subject to the capital, the, the market capital, uh, requirements. But just a blanket exemption to Treasuries, uh, I think would, would raise other issues that need to be addressed.

Ryan, do you have a view?

Yeah, I would just say while the proposal creates significant capacity today, there could be future states of the world where ESLR became binding again, at least on some banks, and it would be helpful to have something countercyclical to offset that. Uh, the trade-offs between different solutions.

Pal,

I prefer, I prefer the approach that was taken rather than exemptions. But I would say with respect to any of these proposals, we need better data on exactly what the impact of them would be on liquidity in the Treasury market in a crisis, given the fact that the dealers only account for, you know, not a lion's share of this market to start with.

And Ben?

Um, in terms of specific exposure exemptions, I think it's important to think about that in the context of the broader framework we discussed earlier. The fact that under the narrow exclusion, there would still be the market risk capital requirements, but also there are many other aspects of the regulatory framework. There are also many aspects of the supervisory framework. So looking at what else is there to address the concerns if there might be exemptions for specific exposures, more of a holistic view.

Yeah, again, we haven't been able to get much disagreement. Uh, there was an intriguing remark uh last night at our dinner table on the implications of exemptions uh for Treasury securities, which is that in the international uh financial stability framework, some other countries might be tempted to also depart from the general uh spirit of the SLR, exempt uh their own government securities, and in some cases that might have adverse implications for international uh financial stability. So I'm going to turn uh next to Brian, and I want to address uh the issue that's come up already, which Tiffany mentioned, which is resilience. That resilience of the Treasury market to events like March 2020 have been more prominent in the interagency working group uh papers on on uh Treasury market reform than everyday liquidity. Do you think the proposed reduction in the ESLR is likely to improve Treasury market liquidity on normal days? Would the proposal improve Treasury market liquidity during a crisis? Is there an advantage, and I think you alluded to this a moment ago, to waiting for crisis conditions as in March 2020 before lowering or exempting uh from the SLR?

Yeah, great. Thanks. Thanks, Darl. And also thanks for for having me here to to speak today. I appreciate it. Um, so I'd say Treasury market liquidity today, normal times, is generally working fine. You could look across a lot of measures, on-the-run, off-the-run spread, market depth, swap spreads, futures basis, you know, all kind of operating fine today. That said, you know, banks are economic actors, and to the extent there was client demand and you had a significant increase in leverage exposure capacity under the proposal, then I think at least at some of the GSIBs, there could be incremental capacity deployed to low RWA, RWA activity, which could on the margin improve liquidity on, you know, a normal trading day. I wouldn't expect banks to go out and buy a bunch of long duration for their banking book, but I think, you know, client financing, client intermediation.

Um, terms of the second point around crisis, you mentioned March 2020. Um, you know, I think that's a great example, right? It seemed like balance sheet constraints were contributing to a deterioration in market liquidity, and regulators stepped in, you know, much to to their credit, and provided temporary relief, and that, you know, helped facilitate, you know, a return to to activity. So, you know, I think a, you know, SLR that is not regularly binding certainly could and and should, um, help, you know, reduce the likelihood of, you know, a dysfunctional Treasury market in periods of stress. That said, you know, it's just one piece. Darl, I know you've written and testified about a bunch of the other pieces, so it's not just the one silver bullet, but I do think it would be a helpful uh part of that process. And then in terms of that final part about is there advantages to kind of acting before or or or waiting. Um, I do think it's helpful to have some countercyclical part of it. There's different ways to do that. There's the narrow exemption in the proposal. I think the Basel standard allows for uh exempting uh reserves in certain situations. You know, both of those have some advantages and disadvantages. You know, you're picking winners and losers between low RWA type activities, which can cause some market distortions. You could bucket all low RWA activity together and exempt that as a group, but that could hollow out the rules. You might need to change the requirements. There's different things to do there. You do a countercyclical buffer, or, you know, just wait for the next crisis. Um, you know, if, if, you know, generally I would say the market doesn't like uncertainty, and generally I would say it's maybe not great policy to be uh working on emergency measures. So to the extent that that path could be explained in advance, the market could discount it in advance, and I think it would lead to better market functioning.

How about, how about some more views? What about this uh countercyclical uh approach? Should the, should the agencies keep something in their back pocket ready to bring out during a crisis, or should they uh try to fix it once and for all? Anyone have a view on that?

Tiffany,

Thanks, Darl. Uh, I, I agree with Brian and clarity. And uh, clarity and having the certainty in regulations is important, particularly as we're managing our balance sheets at banks. We talk about looking at various different scenarios and preparing for a range of outcomes. In those scenarios, we're typically not assuming that there will be any change in regulatory requirements. And we, banks may take action, reduce activity in advance of a stress expecting no changes. So the structural permanent changes, the advanced notice of that helps steer and incentivize the right behaviors in advance of the stress, and then reduces the need to make any ad hoc changes during a stress period.

Don, so I've been a fan of the countercyclical capital buffer applied across capital regimes, risk-based and leverage. We applied it at the Bank of England. Actually, I can't remember whether it was applied to leverage ratio. I'm looking over at Phil. It was applied to leverage ratio. I think a key, and I've advocated it and been rejected by the Federal Reserve many times. It's a familiar position. U, but uh, I think the key is it's not just a one-way street that you have something you reduce in hard times. You have to make sure it's adequate in the good times, that you've got the capital high enough that if you release capital in bad times, leverage or risk-based, that the banking system is still safe. So countercyclical in both directions.

Other views? If not, I'm going to, I'm going to move on and ask Ben a question. So, Ben, uh, the, the Federal Reserve Board staff has estimated a $210 billion decline of capital at the GIB depository institutions, but does, does that matter for financial stability given the much smaller $13 billion projected decline in capital at the GIB holding companies? What are your views on that?

Thank you very much. It's also, it's great to be here today with everyone. When considered in the context of the broader large bank credential framework, I think the financial stability implications of the difference are potentially positive. Uh, this is particularly the case in light of the GIB resolution planning framework and the GIB single point of entry resolution strategy, as well as the design of other Dodd-Frank Act enhanced credential standards, which focus on the holding company. Um, the risk-based requirements are higher for the holding company than the bank, as, as you mentioned, and this reflects the fact that the GIB surcharge and the SCB apply only at the holding company level. That, in turn, is itself illustrative of a key structural feature of the current large bank credential framework, and that's a focus on the holding company. This is codified in Section 165 of the Dodd-Frank Act, and many hallmarks of the current large bank credential framework are all holding company standards. Some examples would include supervisory stress testing, CCAR, and then the stress capital buffer, internal liquidity stress testing, TAC requirements for GIBs, um, and then the joint FDIC and Federal Reserve resolution planning requirements. The proposal explains that it would do three main things. First, restore the ESLR to a backstop. Second, um, address the level and marginal regulatory incentives regarding low risk, low return, and higher risk activities. And third, provide the GSIBs more flexibility in the allocation of capital among their subsidiaries. I, I think the proposal would actually do three things beyond that. Uh, first, it would address the arguably anomalous role of the 6% bank ESLR requirement in the current credential framework. That's a bank-level capital requirement that's capitalized, that's calibrated to be higher than for the holding company, but based on the GIB status of the parent. It's actually the exact opposite structure of the GIB surcharge itself, which of course applies only to the holding company. Second, there would be more consistency in the overall design of credential standards with a focus on the holding company. And third, there'd be more alignment with the resolution planning framework, and in particular the GSIB SPOE resolution strategy. Under that strategy, uh, in the event of failure, only the top-tier holding company would enter insolvency proceedings. The subsidiaries would be resolved without entering into their own separate proceedings. That strategy depends on flexibility, specifically flexibility for the GSIB to provide capital and liquidity to the subsidiaries based on their needs and resolution from centrally available resources. The strategy of course also depends to some degree on pre-positioning, which entails having some capital and liquidity already at the subsidiary level. It's a balance between the two. Uh, so the proposal would therefore have greater consistency with the structural focus on the holding company. There'd be more alignment with the resolution strategy for GSIBs, and from that perspective, there'd be the perspective to potentially have reduced fragility and stress, promotion of the resolvability of GSIBs, and therefore positive financial stability implications.

>> Thanks very much. Uh, Ben, what about other reactions? Uh, is the, the fact that dollars of reduced capital at the holding company is small relative to the depository institution, is that important? Is there sufficient flexibility in capital in, in the, structure of a bank holding company and its, uh, subsidiaries? What, what are your views? Hal, do you have a thought on this? Do you have a thought on this? Hal?

Yeah. Um, so as you said, Darl, uh, the reduction at the depository level was much higher than the reduction at the holding company level. Um, but I think we need to keep in mind the basic framework in which the holding company of a bank has to serve as a source of strength for the bank subsidiaries. So even though you are reducing the capital level at the depository institution subsidiaries, you have the holding company still with this obligation to support the subsidiaries. So I'm not that concerned because the holding company capital is not being reduced by very much at all.

Don, a thought.

Yeah. So, um, I, the fact that the holding company capital is basically unchanged is, is reassuring. I do wonder about the source of strength, uh, thing though, how, I mean, once the capital is upstreamed from the depository to the holding company, downstream to the broker dealer, or if it's not downstream to the broker dealer, won't do any good, right? So presumably the intent of the authorities have it downstream to the broker dealer. Then you have a crisis. You have something happens that no one's anticipated. Are they really going to take the capital back from the broker dealer and give it to the depository institution? In 2008, the board was asked to vote several times on exemptions to upstream capital from the bank to the holding company to support the broker dealer. So I think, uh, we need to think more carefully about whether the holding company would be actually a source of strength in a crisis situation.

Tiffany,

I think that all folds together to the fact that each bank is managing to multiple risk measures. Capital being one, but liquidity, interest rate risk, and other measures will also support the, both the IDI as well as the holding company. So all of those various constraints ultimately inform how much could potentially be upstreamed or or not. So there are additional constraints as part of a holistic risk framework that we are thinking of as well.

Thank you, Brian.

Yeah, I would just add, you know, to to Ben's point, um, you know, the resolution framework for a single point of entry is meant to capture sufficient liquidity and capital at the intermediate holding company to avoid the situation that Don is talking about. Can it effectively do that? It's not clear. Disclosure is not great in that area. Another area where it might be helpful to have more robust discussions around that to give more confidence to more participants that that that actually could work.

And that's about resolution. So you're in a situation where you're managing a failure. So it'd be nice to prevent the failure in the first place.

Ben, did you have a remark on that?

Uh, my only observation is I did refer to reducing fragility, and that's part of the benefit of potentially having greater flexibility. Statement implicit in that reference to fragility is the possibility the point of non-viability is higher in 2015 than it was in 2008. So that's again a reason why I think it's beneficial to consider the capital framework alongside the resolution framework.

Wow. Very complex topic. Don, I, I want to, I want to turn last to you, and you have been an advocate for reducing the SLR in order to make sure that it remains a backstop, as we've discussed, and doesn't impede the willingness of dealers to make markets in Treasuries, as we've also discussed. But you've also noted an important caveat that any adjustment does not reduce resiliency of the banking system. So when you look at the agency's proposals, how does it stack up against these criteria that you have in mind?

Uh, thank you, Darl, and thank you for inviting me to part be part of this panel, to the Vice Chair. So, um, you're right. I've long supported uh enhancing Treasury market liquidity by making the leverage, the SLR a, a backstop. In fact, a senior Federal Reserve official told me a couple years ago, I was using too much of my brain space on the leverage ratio. So I'm grateful to have that space freed up for something else. Um, but as you noted, my support has been couched in the context that it not reduce overall capital requirements and resiliency. And I think I take quite a bit of comfort from the fact that there's no reduction in the holding on the holding company level. But I, I do think, as I just noted, there are things we need to think about, and I still have a few concerns on this overall resiliency issue I'd like to surface and I hope, um, come up in the agency's consideration. First, obviously, making the SLR a backstop puts extra pressure on sound risk-based capital requirements. Uh, and I think financial sector resilience is especially important right now. The economy could well be on track for good growth and low inflation. That's was priced into financial markets, but we shouldn't be lured into complacency. Secretary Yellen last night worried about procyclicality in financial markets. She cited private credit in that regard. But we know banks and bank regul, from history, we know banks and bank regulators are not immune to this particular disease. And the tales of the distributions around the central tendency seem unusually fat. As we are in uncharted waters with respect to the evolution of the global trading system, the ratio of federal debt to national income, and challenges to the independence of the Fed. So I think the risk of unanticipated developments are particularly high right now, and it would be preferable to evaluate this proposal as part of a holistic review of all capital requirements. In that respect, this is a terrific conference, putting putting all this together. There's so many in the, in the risk-based capital, there's the B, the Basel III endgame, GSIB requirements, and the stress tests, and how are they all going to fit into this? So if risk-based capital requirements, the first line of defense, are weakened, I'd need to rethink my support for, for reducing the backstop. And I urge the agencies to, um, put the whole package together before signing off and, uh, in one piece. And the second point, I want to come back to something that came up before, and that is, uh, releasing capital at the DI will not reduce the resilience overall in, uh, organization, but you will be encouraging, in fact, one of the benefits cited in the thing is encouraging banks to buy Treasury securities. So it does expose them to added interest rate risk. Widespread losses on, um, Treasury and agency securities contributed not only to SVB's problems, but the risk to the broader system that triggered extraordinary actions by the authorities in March of '23. So banks should be required to mark securities in the available-for-sale portfolio to market, and the available-for-sale portfolios should be subject to market risk capital requirements. Bank interest rate risk management, even for the hold-to-maturity portfolio, should be subject to close, close scrutiny, and as I noted, um, my concern about interest rate risk would, would make me very reluctant, would make me opposed to exempting all Treasuries from the leverage ratio.

So the gist of your remark is that you want to see the whole package before the final, a final view on it?

Yes.

Yeah, interesting. And and other, Hal, what's your view on this?

So I think we need to keep in mind that the US banking system is today very well capitalized. US GSIB actual capital levels have increased 17% over the past two years, and our minimum capital requirements are now 1.7 times higher than the Basel requirements, $837 billion versus $473 billion, um, under Basel because of our stress testing regime and gold-plating them. Keep in mind that we gold-plate the Basel requirements. This proposal does not reduce risk-based capital. It merely moves leverage into the background where it always has belonged, and in my view, we could do away with it. Okay. And if it's in the background, you can further say, why do we need it then? If it's now in the background, it's not binding anybody. Okay. So anyway, I, I don't, I think overall the US banking system is in a very good place today in terms of its actual capital levels.

You, Hal, you mentioned gold-plating. I'd like to get, uh, a reaction to something that came up, another topic that came up at dinner last night, which is the implications of the SLR and other, uh, regulations on the ability of US banks to compete both with non-bank financial institutions and with international banking institutions. First, is that competitive angle, does it figure, uh, in your minds, uh, as an important aspect of the rule change? And secondly, is it actually true that, uh, US banks have been at a, or GSIBs have been at a competitive disadvantage because of the capital requirements that we've been discussing? I, I quite frankly don't know the answer to that, but I would be skeptical. I think there are a lot of other factors that affect competitiveness. I mean, you know, when we originally adopted Basel, it was because of competitiveness concerns with the Japanese banks, right? And we said, we'll get them on an even playing level, they'll have to have the same capital as we do. But then it turns out they have different accounting systems, they have different government subsidies, they have different forms of regulation. They have nothing to do with capital. So you have to add all of that into the picture when you're thinking about competitiveness.

Any other reactions on competitiveness?

Ryan,

I would just say certainly we have a higher SLR requirement than other jurisdictions, although that does not seem to have stopped our banks from competing very well against a lot of the international banks. I think certainly non-bank financials have, you know, significantly increased their scale and scope in some of these businesses, and they're obviously they don't have the same regulation, so that that might have merit.

As a, I mean, moderators don't get to vent their own views, but it does seem like better capitalized banks are better able to compete in principle.

Yeah, that was the point I was going to make. I don't think the UK, European, Japanese banks would think that they're at an advantage because their, uh, their capital hasn't been gold-plated. I think the US banks are pretty much, uh, competing very, very well in the international, in the international field, and there are, uh, times when being well-capitalized, being having high capital is to your advantage because, of course, under stress, there's much less, much less to worry about. We saw that in the, in the US in the March '23 situation where deposits fled from regional banks, where, um, people were concerned about the embedded losses on Treasuries and other things, and they fled to the GSIBs, and some, some of the commentary, well, that's because the GSIBs are too big to fail, but I think, um, it was also because the GSIBs were much better capitalized and much, much less likely to fail.

Okay, I'll make one observation which is, do receive a lot of questions about the regulatory capital or liquidity treatment about particular transactions or products and things of that nature. I think that does clearly illustrate that they're marginal incentives, and essentially what the marginal capital cost, liquidity cost does factor in. That's not necessarily contradictory, but I think it does show that there, that that actual marginal effects of regulation do factor into business decisions, and there are differences between US and non-US requirements.

Tiffany, at a global bank?

Well, I was going to to, um, rehighlight some of Don's points. One being, completely support interest rate risk management. It's a strong pillar. It's an important risk pillar, and as I mentioned, it's an important, um, part of the overall risk management framework for banks. Second, the holistic review, I think is an important point as well, because we find that again, managing to a lot of risk measures, making a change to one risk measure is likely going to have another become binding over time and could have the same constraints, let's say, on the Treasury market. So I think that holistic review is, uh, also makes a lot of sense.

Terrific. Okay, I think we got a pretty good sense of the views of the panel, and I think it's time to turn to you all. Uh, if you have a question, uh, I would, you raise a hand. I see there are microphones. Would you also please identify yourself and try to keep it to a question, just one? Uh, if we have a second round, we can come back and, and not a speech, just a question please.

Is this, my name is Gujang, I'm with SIFMA. Uh, my question is, as you know, uh, currently category one, two, three banks are subject to two leverage ratios, one is the supplementary leverage ratio, the other one's the Tier 1 leverage ratio, and the question is, why do you think two ratios, both targeting leverage, are needed for these banks?

Okay, I'm going to, I'm going to ask anyone that can address that question, uh, cuz I don't want to handle that one. Hal, do you have a thought on that?

I'm not going to defend one of two ratios when I disagree with both of them.

Okay, I'm, I'm watching for hands.

Yes.

Hi, Shiron Shai from Morgan Stanley. I actually have a question directly to Don. You mentioned, um, that you think that we should have a countercyclical buffer. You mentioned overlap between different parts of the capital regime. You mentioned that it, it was something that made sense in the UK. But at the same time, the US has a much different capital regime, inclusive of the CCAR test, for example, which does give you an ability to build capital to be there for stress. And so I, I'm curious as to why you would want to impair potential use of capital from the banking institutions in a period of stress where they could be using it to lend and still put on an additional countercyclical buffer on top of that. So it's, it's almost as though the, the concept behind, um, having overlap is not necessarily taken into account from a buffer mentality where you, you don't necessarily have the CCAR exam in the United, in, in the UK.

Yeah, so I, I certainly think, um, uh, there's simplification and the two leverage ratios and overlap between things. So this, that's why this is such a great event today because the authorities can hear views about how these things interact and whatnot. But I do think my countercyclical buffer, uh, thought, at least the way we exercised it in the UK, was exactly to free up capital in a stress event. And by lowering the counter, by taking out the countercyclical part, you enabled banks to use that capital without running into restrictions on dividends and buybacks and that kind of thing. So our view, and I think, um, as I've read the studies that came out of the March 2020 COVID thing, that for, uh, countries in Europe that had countercyclical buffers, they found that it did, the ones that released those buffers had better lending experiences than the ones that didn't. So the whole, maybe I didn't understand quite your question totally, but the whole point of the countercyclical buffer is to encourage lending in stress situations or discourage having a constriction of credit add to a stress situation.

Alistair. Oh, sorry. Uh, yes, you. Thank you.

Bill D. I'm the CEO of BNC. Um,

Just an observation. This entire conversation on leverage ratio and then pointing to the functioning of the Treasury market. What we're actually talking about is the ability of, um, prime brokers to increase their balance sheet in times of stress. So the, so the noise around, hey, banks are just going to go buy more, trade themselves up because they can take more interest rate. We're not going to buy any more Treasuries. We can get duration a hundred, 100 different ways without going to the Treasury market, and we can do it off-balance sheet through swaps. What we're simply talking about is, is it a good idea to give the ability to grow their prime brokerage operation to support the actual capital providers into the Treasury market today, which are principally hedge funds? And by the way, I am in favor of that, but I would reduce the conversation to that because I think our issue ultimately becomes the size of prime brokerage across Wall Street as opposed to what the leverage ratio is.

So, Bill, would the, would the support for prime, for hedge funds and others through prime brokerage increase in a stress? So I think one risk isn't it that, uh, that this actually enables the hedge funds to become more levered? Yes. Because banks,

And then, and now you've got a stress hits and

The margins start increasing, and the pressure on the hedge funds, the basis trade, blows up even worse. You're picking your poison, but that is the correct discussion. So, um, banks, you know, since I worked on a primary dealer desk 30 years ago, they don't take down the auctions anymore, right? We used to. We no longer. The bank, the hedge funds bid the auctions; we, you know, the big banks finance the auctions. If you get an off-the-run Treasury that won't trade because it's unfinancable, you get disruption and dislocation. So, you want to be able to finance it. You say, "All right, well, I want the Treasury market to function because we're running the biggest deficit we ever had, and it's likely to grow. So therefore, I need to get capacity to make this thing work. I need to expand primary dealer, the the the prime brokerage, central clearing, a whole bunch of other things to allow that to happen." All of which I'm in favor for. But I'm simply saying that you are, we're consciously choosing to ask banks to finance a larger portion of the principal positions of the players in the Treasury markets. That's what this rule is about.

Yes, Pete, a question right here.

Uh, I have a follow-up, actually, to to Bill's observation.

Could you give your name?

Uh, Peter Blasting, PV Investment Partners. So, uh, a follow-up to Bill's question is, uh, perhaps, uh, heretical, uh, which is to ask, uh, are there other, uh, rules that should be addressed if we're trying to get more Treasury market liquidity? Namely, uh, proprietary trading in the Volcker Rule? Should banks rebuild, uh, relative value fixed income desks that all migrated out of the banks post Dodd-Frank, post Volcker? And that should be the place for Treasury market intermediation rather than hedge funds, as Bill suggests. Just an off-the-run thought. Thank you. I'm curious if any panelists support that view.

Any views? Panelists.

Well, I think in the context of looking at and taking a look at regulations overall, it's, uh, an important holistic piece of, you know, the discussion today. I do think in the context of, you know, intermediation is one piece of the Treasury market. Certainly, that is a very important activity during a period of stress, but to the point of it's a $30 trillion, close to $30 trillion market today, growing intermediaries are one player in that market. Buyers and holders across all different banks is something that we need to and should consider to continue to support that market. Um, so that's the kind of broad view, and, you know, looking at broadly regulations overall is, I think certainly the leverage ratio is a step in the right direction, but taking that big picture view as part of that holistic discussion that we're having here today as well.

Subjected to market risk capital.

Market risk, interest rate risk management.

Interest rate risk management, right.

The, uh, the proposal does, uh, cite some research, for example, by Falk Brining and Hillary Stein, uh, at the Federal Reserve Bank of Boston, showing that those dealers that were relatively more constrained by, uh, SLR provided relatively less liquidity to Treasury markets in the March 2020 event. And more recently, a Federal Reserve Board, uh, study by Mary Tion and her co-authors showed that those banks that have more headroom under the supplementary leverage ratio provided more financing, uh, to Bill's point in the Treasury market. So there is some, uh, research in, in support of, of what you're all saying.

Other, Darl.

Yes. How so? I understood the question basically was, let's get rid of the Volcker Rule so we can have more prop trading that could actually help the Treasury market. If I, the implication, okay.

Okay, so, um, you know, I never, well, I understood why we had the Volcker Rule. It was kind of a populist measure back at the time when Scott Brown got elected in Massachusetts. Um, so I remember the Senate hearing on this, and the Democrats being puzzled about why we're even doing this. If prop trading would help the Treasury market, I would be in favor of re-examining the Volcker Rule. But I, I want to caution everyone as we talk about all these changes, there is legislation to consider here. This is not something that the Fed or other regulators can easily do on their own. A lot of these changes are embedded in statute. Okay. Now, maybe the President can be creative with executive orders in this area, but as we proceed on this line, we have to ask ourselves how much can the regulators do without legislative change. And that's a big constraint. Okay.

In this picture.

Just to be clear, in the legislation, the Treasury market is exempted, uh, from the Volcker Rule, so it doesn't really restrict proprietary trading in the Treasury market. So let's have another, another question.

That's not true. Treasury securities are not exempted from the Volcker Rule. I think they are.

Uh, Darl. Sorry, Michelle Ko. Hi. Uh, sort of an efficiency question along those same lines. If we're worried about specific activities, okay? And if we're worried about source of strength, source of strength, actually being source of strength at the holding company level, why aren't we more worried about the capital at the IDI level as opposed to the holding company level?

So, let's, let's revisit that. Anyone have a reaction on on this, uh, issue of capital at the, uh, insured depository versus the holding company? Ben, you have your, your.

I, I think capital at the insured depository institution level is a relevant consideration, but we're looking at it today from a level that's high based on a leverage requirement that's also uniquely applicable at the G-IDI level, which is just not aligned with the general framework that we currently have. Um, and so it is important to balance what's at the holding company, what's at the bank, and I, as I expressed earlier, I think this rule would strike a better balance, but that doesn't mean that going lower is in, in forever going to be a better thing. It's that it's necessary to balance all these things. So it's that this rule strikes a better relationship with the broader framework in, in my view.

Okay, I'm watching for hands. I'm also watching the time. We have a couple more minutes.

Some. Yes. Now, Al.

Sure. Uh, thank you. Uh, Al Moffett, JP Morgan Chase. Um, so there's been a lot of discussion just earlier about the role of the leverage ratios as it relates to the Treasury market. And one thing I haven't heard from the panel is the effect on deposits. And so one of the things we saw during, uh, during the periods of QE was that there was significant growth in deposits prior to the Fed rolling out the overnight RP program. And it strikes me that the changes to leverage ratio may, you know, reshape that through a potential next crisis. And I'm just wondering if the panel has any thoughts on the role of, you know, particularly the value of changing the, um, the SLR for the IDI and the consequence on deposits and other low-risk activities like that, even if they are put into cash and not 30-year Treasury bonds. Um, but, uh, and, and just, you know, maybe that offers flexibility for the Federal Reserve and the size of the RP program. But welcome any thoughts. Who has a thought about this?

Ben.

I was going to say the economic analysis of the proposal makes very clear that just in the past years and probably over longer periods, the degree of, um, low-risk assets, treasuries, reserve bank deposits are much higher now than they've been in, um, historical past. Um, and I think that's important for the ESLR. It's also important for the basic tier one leverage ratio. The 4% 5% structure and the prompt corrective action frameworks been around for a very long time. When it first was implemented, I'm would be very confident that reserve bank balances and treasuries were a much smaller portion of bank balance sheets. Thinking about the overall structure of the capital framework, looking at the evolution of bank balance sheets, the degree of low-risk activities that are related to deposit taking, liquidity risk management, I think it's a very important consideration.

Tiffany.

I agree. The, as you mentioned, Al, heightened cash balances, heightened deposits, particularly in a period of stress. It typically coincides with when also Treasury intermediation is important, but ensuring, which is why we talk about a targeted approach. A targeted approach that specifically excludes cash, for example, because banks tend to be that shock absorber of cash and deposits, whether it be in the immediate stress or afterwards, as a result of monetary or fiscal policy. And banks having the ability to support that in periods particularly of volatility or stress is important, and I agree that the both supplemental leverage ratio as well as the tier one leverage ratio should also focus on that.

Yes. And I think, uh, just to reinforce that, making sure the leverage ratio doesn't impede the banking system when the Fed is doing QE and, um, adding to those deposits that you were talking about. And that's at the Bank of England. And that's, we exempted deposits at the Bank of England, um, when we wanted to, uh, wanted to make sure that was, that was. So I, I think so, as I said, I would be opposed to exempting Treasuries blanket, but I think making, um, thinking about exempting deposits at the Federal Reserve from the denominator along with the other things is, is worth consideration.

And, and that's a good point in that the PUE has made that exclusion as well in their leverage ratios, specifically for cash.

If I could, I just have a quick add-on that ought to be part of this discussion, and that's FDIC insurance on the size of your balance sheet. They're the only measure still left where you go period end. And so one of the reasons you see repo get very tight at the end of a month is simply because everybody's calculating their balance sheet on period end. If they averaged it, you'd likely get rid of the month-end crunches. It seems to be a pretty easy fix.

Good to know. Okay, so, uh, we've run our allotted time. I just want to thank the panel for an extremely illuminating discussion, lots of back and forth, good audience participation. I learned a lot, and I want to thank Vice Chair Bowman again for inviting us to speak here today. Thank you.

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The next one.

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Heat. Heat.

My feel.

Yeah.

Hey.

Heat. Heat.

I feel.

All right, we'll get started in about 30 seconds. So, if you haven't taken your seat already, I ask that you please do so. Uh, good morning. Uh, my name is Jonathan Gould. I'm the 32nd Comptroller of the Currency. Although I was sworn in less than a week ago, it's great to be here. Uh, and I look forward to engaging on these very important issues going forward. Uh, I greatly appreciate the range of perspectives and views that are being presented here today, and I thank the Vice Chair for Supervision for her efforts in this area and her invitation to attend today's event. One of my areas of focus as Comptroller is ensuring regulation and supervision are properly calibrated and appropriately focused on safety and soundness. To that end, I believe it is impro, it is prudent to consider the appropriate risk tolerances and capital requirements that are required for the largest banks and how these choices may impact other banks as well. This next panel is focused on the evolution of the capital framework, including what has come to be known as Basel 3. This distinguished panel will share their thoughts on several topics of interest, including the global framework, tailoring, interactions with other credential requirements such as stress tests, and the impacts on economic growth and financial stability. I'd like to thank our distinguished panelists for appearing today and would like to turn the discussion over to panel moderator, the inimitable Rob Blackwell.

Thank you.

Thank you very much. Thank you very much, and thank you to, uh, Fed Vice Chair Bowman for for having this conference. This is very exciting. I have a wonderful panel in front of us. I am not going to do justice to any of their biographies. That way we can get straight to the questions and presentation, but so that we'll, we'll give you a brief overview. Phil Evans, to my left, is Director of Prudential Policy at the Bank of England. As part of that role, he's in charge of implementing Basel Endgame in the UK, called Basel 3.1 there. He previously was in charge of coordinating the bank's work on the UK's withdrawal from the European Union. Shar Fredman is the Chief Accounting Officer and Controller for Goldman Sachs. As such, she, she is responsible for the oversight of external and internal reporting, product control, and regulatory capital. Randall Corals is the Chairman and Co-founder of the Senosia Group, a Utah-based investment firm. He was the first person to serve as Vice Chair of Supervision at banking supervision at the Fed, serving that role for four years between 2017 and 2021. Last and not least is Mike Mayo, is Managing Director and Head of the US Large Cap Bank Research at Wells Fargo Securities. He is the first analyst to testify on the causes of the great financial crisis, and he is representing himself, not the views of the bank. So, I'm, I'm going to actually kick off, right? I just want to make that clear from the outset. I'm going to, I'm going to kick it off and, and you'll see why in a second. Uh, I, I, I'm going to kick it off directly to Mike, who's going to give us an overview, a brief overview, but very entertaining overview of how we got here. When we talk about Basel Endgame, what are we looking at, and how did we end up in this place?

Well, Rob, thank you, and thank you to.

The mic. Mic button.

Mic to the mic. Yeah, it's the button with a voice.

Oh, it's the big with the mouth.

Yep.

Okay, there we go. Um, look, what I found in the hallway as I look, I, I love the idea of a regulatory reset. Let's keep banks safe and sound, but rip out as much bureaucracy and red tape as possible. Um, and so I'd start with, um, look, first, thank you, regulators, for what you did after the global financial crisis. You made the system so much more strong, uh, than elsewhere around the world. And I'll spend two and a half minutes on these. Um, but the system today, it's too confusing, too constraining, and too costly. And when I worked here in this building 35 years ago, the capital rules were simple and weak. And today they are complex and strong. So let's make them simpler and strong. And I did a proprietary survey to institutional investors. Those are the largest pension, hedge funds, mutual funds around. And nine out of 10 investors, these are the owners of the banks, find the capital rules confusing. There's too much regulatory risk. Regulatory risk wasn't even a phrase a few decades ago. There's other risks you have to contend with, not the four words that strike at the heart of investors: What will regulators do? There's too many targets. It's acronym soup. And too much capital volatility. It's too much of a black box. You don't know the cost of goods sold until after the fact. I mean, if you're selling, selling steak all puave, and you don't know the cost of the steak until after, that's a problem. Um, look, nobody wants to go back to 2007, but right now, the pendulum swung too far. Uh, same investor survey, nine out of 10 investors find regulation too strict. Too much marginalization of banks. If you look at loan growth by decade, the last few years, it's been flat to negative inflation-adjusted. Too much disintermediation, marginalization of banks, too much business leaving the banking system, and too much disregard of de-risking. 15 years, you've done a great job, regulators, as of, you know, 10 years ago. You've doubled, you know, capital, roughly. You've doubled liquid assets. Banks have not stretched for loan growth. But as I learned here, I learned my best lessons here at the board 35 years ago. If it grows like a weed, maybe it's a weed. Banks have not been growing loans like a weed. And look at what the $7 trillion investment grade bond market says about bank safety. They're saying banks are safe. In fact, they've said banks are safe for most of the period for the last decade. And it's too costly. These are our best estimates, but roughly 20% of bank expenses are related to regulatory compliance, cyber, all-in. And then when we poll large banks, they think they could maybe save 10 to 20% of that. So you, you're looking at a possibility of saving 4% of expenses. And in our investor survey, what investors are looking for are greater efficiency from regulation and greater loan growth. And there's too many moats around the largest banks. Talk about unintended consequences. By the way, this, when I, I worked in the applications, the merger group here 35 years ago, we would approve mergers in 60 days, and we had one review said I looked at a hundred applications in a year or something. And the unintended consequence is fine, I'll just keep increasing my price targets on the largest banks. We should have more trillion-dollar banks to compete against JP Morgan. Goliath is winning. They're gaining share. And then there's the loss of talent. For every executive that comes into the banking industry, five are leaving. Talent drain. So, 10 unintended consequences: too much regulatory risk, complexity, targets, volatility, marginalization, disintermediation, expenses, loss of talent. But there's hope. This works here. The hope is this. I had to bring children's scissors to fit through the metal detector in the airport. So, well, this is the hope. Okay, that's the hope. And the end result here then is just win-win-win. Regulators, you can have more efficient oversight. The banks, yes, they'll be more profitable, more efficient, but the customers will have better terms and more options. So, with that, I was going to hand this over to Phil, who can describe how we got to the state in Basel 3.

Oh, blow me. I think I'm going to be a bit less entertaining than that. So I thought I'd take this, uh, two, two ways, basically. So I'll talk first about the benefits of having a kind of, um, an internationally aligned approach. What benefits does that give us in general terms? And then I'll get on to the specifics about why this Basel endgame package is, um, uh, uh, why, why are we doing it? So on the general, and I guess this is one of the key points I wanted to get across today. I mean, I'm going to argue that international standards are things that we benefit from. The reason we do them is we get benefits, and there are many that you could talk about. The two that I would pick out are, uh, in terms of first, international financial stability. So we are, we are, and still remain so interconnected that when something goes wrong, um, globally on financial stability, it affects everyone, and those costs are deep still. And the second is on, uh, the role of international standards promoting trade in financial services. So, um, you know, large, large global banks have economies of scale and scope, and they, part of the way they get those is having similar rules across borders. Um, so it's what allows domestic banks to operate abroad and foreign banks to operate, uh, domestically. So that's the general. What, what about the, um, uh, what about the specific on Basel game? So, um, as Rob said, our version of that is called Basel 3.1. So we, um, we couldn't quite bring ourselves to call it Basel 4, and so, and so we had like a tiny, teeny, weeny Basel 3.1. Um, but my guess is we were kind of like, we were looking for the same kind of comfort blanket that you guys were when you called it Basel. Um, it's part of the post GFC reform package. So it's the third bit. Um, first two bits were about the quantum of capital, and then the quality of capital. So quantum, we've done already. So I, I don't think that the Basel endgame package needs to be about the quantum of capital at all. What is it about? It's about measuring risk better. Right? So the standardized approach we have at the moment, it, uh, the standardized approach is always going to be blunt, but it's just very blunt, the one we have at the moment. And so we're kind of tilting it just so that it picks up risk better for the right activities. Um, and that is important in its own right, but it also has benefits for competition because one of the things that we feel strongly in the UK is that smaller banks have been unable to compete on low-risk activities because they're forced up the risk curve by this very blunt standardized approach. And so, um, a big benefit is to improve competition. Um, on the model risk weight side, we kind of lost confidence in that a bit. So we had these P papers post crisis where we were running experiments. We gave firms the same, um, exactly the same, um, scenario, run it through your models, and they throw out completely different risk weights, and that, that kind of drains confidence. So one of the things we're doing in this endgame package through 3, 3.1 thing is a bunch of things to try and bring back some of that confidence again. So through things like the output floor. So, so I'd argue, um, there's a lot to like about international standards in general because they give us benefits, but this particular package, um, is balanced and, um, gives us some good things.

All right, well, well, thank you very much. As everyone in this room knows, this is not the first time we've taken a run at Basel Endgame. So, I, I'd like to ask Randy to start off and give us a sense of what were the mistakes that regulators have made in the past? What are things that should be avoided now as they craft this again?

Um, uh, well, I, I guess it depends on when in the past, uh, you're talking about, uh, because there have been a few efforts, and some were better than others, as it turns out. But, uh, uh, the, uh, I, so I think there are, I think there, with respect to what ought to happen and finishing the implementation of Basel 3, I think there are substantive issues and there are process issues. The first substantive issue is that, uh, these measures, even in Basel, you know, as Phil mentioned, this isn't about the quantum of capital, and it was not about the quantum of capital when these measures were being discussed in Basel. It's about the incentives that the overall capital framework is creating, and they were not intended to increase the quantum of capital. And I think that should be a first principle of implementation here in the United States, not just because it's sensible, it's also Basel compliant. Uh, it's not intended to increase the the aggregate amount of capital in the system. Um, I think, uh, and, and there have been proposals around implementing Basel 3 that would have done that, and I think that, you know, I, I think that that was the wrong direction. Um, as a matter of process, I think it is a mistake not to get as much input as possible. And so this conference is, uh, you know, is a paradigmatic example of how one ought not to go about the process of the implementation of of these last measures of Basel 3. Uh, you know, from all, you know, from all sorts of areas, more heads are better than one. Uh, you know, I think there have been, uh, folks who have said, look, I've, here's a proposal, if you don't like it, vote no. And that's, you know, it is a better process to have gotten input from everybody in this room, folks outside of this room, academics, banks, public interest, I, I think banks are part of the public interest, but, um, uh, you know, a wide range of groups. And I think if you combine those basic principles, then there, there can be an successful result. I would add that I do think there should be a successful result. I've heard, you know, there have been threads, uh, over the course of the last several months that maybe we just drop, uh, these last measures of Basel, and I think that's not in the interest of the United States. Bill makes a good case for, you know, global financial stability. I, I used to be a global financial stability guy. I have nothing against global financial stability, uh, per se, but, um, but the Basel process, uh, particularly the Basel capital process, has really always been in the fundamental interest of the United States. How Scott mentioned that the very first Basel was because the Japanese banks were being allowed to operate with $12.73 of capital, and they were hoovering up all the business in the world. Literally all the business in the world. Those of you with gray hair around here will remember the late 80s, and it was like US banks could not compete because the Japanese banks did not need to have any material amount of capital. And so the first Basel effort was to say globally active banks will have globally consistent capitals. Now, that was, you know, that was fair, it was crude, uh, and simple, but it was a first effort. Then during the '90s, the European banks were operating with much less capital than the American banks, and so Basel 2 was this complicated effort to create an intellectual framework that would justify allowing the US banks to lower their capital to the levels of the European banks. The math club went to Switzerland. It was extremely difficult to understand, but people felt confident at the end that the capital could come down. No sooner was that done than you had the great financial crisis. Whoops, wrong direction. Capital needs to come up instead of down. And Basel 3 has been ensuring that particularly the Europeans, but global capital levels in general, are consistent. If you don't like what's coming out of Basel, what I say to the folks who wear my political football jersey, who believe that we go into these fora and are snookered by the, uh, Europeans, it's like, that's not what happens at all. If you don't like what is coming out of Basel, it's because you don't like what the US took into Basel. We generally get everything we want out of Basel in order to create this level playing field. And if we didn't have Basel, we would all be subject to these same rules because that's what we took in, and the, and the rest of the world would not. So I do think it's very important that following these principles of, you know, of of not increasing aggregate capital, doing it in a sane and smart way, getting a lot of input on the technicalities, that we do finish the implementation of Basel.

Well, thank you. Shar, do you want to weigh in on where you think the mistakes were in the past?

Sure. Um, thank you very much. Um, and I agree with everything that my other panelists have said. I think it's important to take a step back, um, in light of the history journey that Randy just took us on, um, and recognize that what is attempting to be done in Basel 3 endgame is what's transpired over the last four decades and four iterations of of changes to the capital framework in that it addresses every component of the risk-weighted asset calculation and the ratio constructs themselves. So, so it's a significant book of work, and, and some could argue the most significant book of work. Um, and, and in my mind, there were two flaws in the design of the original NPR, both of which relate to isolation. Um, the proposal was done in isolation of the other components of the capital framework, and the, and the proposal was done in isolation relative to what was being done internationally. So as it relates to the capital framework, what's unique with the United States relative to every other major jurisdiction around the globe is that the stress capital buffer is a pillar one requirement, which means it's included in your capital ratio requirements. And therefore, when you're going to overlay Basel 3 endgame with the stress capital buffer, you need to be extremely mindful of the capitalization included in each affecting the same asset class or markets or products. And it didn't appear as though, based upon how the NPR was proposed, that that was done to a sufficient level. Um, so that's one, uh, component of where it was done in isolation, and I think, didn't calibrate correctly. The second is it was done in isolation relative to the rest of the world. Um, and there are components that were included in the NPR that no other jurisdiction in the world implemented. So, for example, the SFT minimum haircut floor was included in the NPR. No other jurisdiction has implemented it. The, uh, public listing requirement to get an investment grade rating was not, uh, implemented in any other major jurisdiction in the world. And so, as a result, it's not surprising that 97% of the responders to the NPR were against it in some way, shape, or form. So the good news, and, and part of it is, you know, the energy that you're feeling in this conference is the Federal Reserve has the opportunity to repropose Basel 3 endgame. And I agree with Randy's statements that that it should be on the docket of the, the many things that Vice Chair Bowman, uh, needs to do. Um, but the good news is Vice Chair Bowman specifically has discussed the importance of looking at capital holistically and the relationship between all the different components. And then from an international perspective, because most, um, uh, jurisdictions are further along in implementing Basel 3 endgame, you know, the answer as to what every jurisdiction around the world has done, and that can kind of start as the blueprint as to how the Federal Reserve wants to repropose.

Well, thank you for that. I, I think since it's, it's entitled the evolution of the capital framework, I want to know, what would a successful Basel 3 endgame final rule look like? I mean, how would we know if we'd succeeded in what we're attempting to do here?

I'm happy to start, and others can weigh in. Um, every time a new capital rule is put into place, whether it's in the US or internationally, what essentially is being balanced is safety and soundness versus, uh, growth, uh, innovation, capital markets, etc. Uh, and so, in theory, you're weighing, and the regulators are weighing those two things in making all of the decisions around capital implementation. And so to the extent that the only thing you cared about was safety and soundness, you could make banks hold infinite amounts of capital. Um, and as a result, um, you wouldn't have to worry about safety and soundness. But what would be the other side of that? Corporate bond underwriting would come to a screeching halt because there would be nobody available to underwrite. Corporations that want to hedge their interest rate risk or their commodity risk or their FX risk have no counterparties that they can face, mortgage lending, credit card lending, etc. And so it's really about striking that balance between economic growth and safety and soundness. And so when you look at the way in which most other jurisdictions have implemented Basel 3 endgame, they've really tried to achieve that balance. And, and in some ways, it comes back to that capital neutrality point. And so there are certain components of the rule that they've implemented that incentivize economic growth. As an example, most jurisdictions have exempted end-users from the CVA add-on included in Basel 3 endgame, and that's to protect those corporations from that in the burden of the banks carrying increased capital associated with facing them as a counterparty. Many jurisdictions have not applied the 400% risk weight to public equity, to to private equity, to all private equity, but limited it to speculative private equity so that banks can continue to participate in more mature private equity, which is often on the precipice of them ultimately becoming public equity. And so, to me, a successful Basel 3 endgame look has appropriately balanced safety and soundness, which is obviously incredibly important, but also economic growth.

Randy, do you have a view? What, what does success look like?

Uh, I, actually, I think that was a, a, uh, pretty good overview of what a successful implementation would look like, if you would. The, the purpose of these last measures is to create, uh, incentives with respect to bank activity without, uh, increasing the capital burden, if you will. And I think if you see, uh, you know, bank activity modifying appropriately in light of the areas where these new capital, uh, requirements are being implemented, uh, in a way that is supportive of economic growth, but you actually see, okay, well, the banks are, are changing their, uh, you know, we have, in fact, created incentives. We're seeing that the incentives are operating appropriately, and we haven't increased the overall capital burden, uh, on the system. That's a success.

Phil.

Yeah, I mean, the, so the best way for me to answer that is to, uh, is to couch it in terms of, like, the way we tried to construct our own implementation of this. So I guess, I guess there were three things. So one was from the bottom up, activity by activity. We were, we weren't looking for too little capital, but we weren't looking for too much either. So that, a, kind of fair amount of capital, if you like. And then top, top down, we had a view that there was enough capital in the system. So this wasn't meant to be about looking for more capital overall. And then third, um, we were looking for international consistency. So we were monitoring what other people, what, what other countries were doing. Um, so what does a good one look like? I think it, um, it looks like those things coming through. So the, uh, the playing field looks level. Um, we've got consistency across jurisdictions. We're looking to make sure that capital isn't rising. So, one of the things we probably, and we'll probably get on onto this when we talk about stress testing, is we had a principle from the beginning that we shouldn't double count. So, if there was something where we were holding capital previously in some part of the stack, and now Basel 3.1's coming in, and you're holding it in pillar one, and it's the same thing, then you don't need to hold the capital twice. And that was a principle that we tried to build in from the bottom. Um, it's easier said than done sometimes. So, so it's not always obvious what is a double count. Final thing I'd say, um, so I, I do think there's some something in this for small firms. So, um, so the risk, the risk sensitivity that I mentioned, I think, um, is a good thing for small firms on the standardized approach, and I'd like, um, so I think we'd be looking for in our implementation, just a bit of a level, um, leveling the playing field between small and large firms.

It, and most importantly, less loans to the shadows.

The, I, I think one of the things that Randy, you just touched on, was this idea that what happens if the US doesn't complete Basel 3 endgame, and there have been some lawmakers who are concerned about the international framework as if we're deferring to international regulators on what to do here. So let me just ask each of you, what happens if the US just decides not to implement Basel 3 endgame and lets it go?

Yeah. Um, an important question. I mean, I guess the first thing to say is, um, I hope that doesn't happen. Uh, because, you know, because we, so, speaking for the UK, we get tremendous value from our close, um, collaboration with, with our US counterparts. It really, um, it really does make a difference to have the US as an integral part of the international community. I, I guess a bit more concretely though, we, so I haven't, I haven't really seen evidence of that, um, that it's particularly likely. So the, like, my my reading of the consensus is that it doesn't seem very likely. And I guess at one level, I don't find that surprising because, in the way Randy and I have tried to describe the benefits of kind of being similar across jurisdictions is good for, it's good for global financial stability. It does help with level, um, leveling the playing field, and, you know, these are all things that we recognized that the US recognized when this was being negotiated in the first place. So I'd argue that, um, banks, large US banks as well as UK banks benefit from that con, uh, benefit from that consistency. So you'd want to do it, is, um, I think, what I'm saying. Um, so all of that explains why we're a long way down the track in terms of our implementation. But so, I mean, given those arguments, if the US really didn't implement, obviously that would be a major issue. Um, and I think it would be wrong to deny that it would be a major issue. Um, so although I think there are strong drivers to to get Basel game done, you know, we'd have to cross that bridge when we come to it. But I know US authorities that we speak to anyway understand that very well.

Sure. Yeah, I was just going to kind of agree with my panelists. I think that, um, although my perspective is obviously different as a practitioner, um, the importance of having the banks around the world on a on a similar and consistent capital framework, um, recognizing that it can be gold-plated in some jurisdictions versus other, and all things that need to be addressed and discussed, um, that I do think that it's important that the US implement Basel 3 endgame to be consistent with the other, uh, banks around the world.

Randy, anything to add to what you said earlier?

Yeah, I, I think the, I think the principal consequence would be, uh, when we get to Basel 4, which we will, uh, there will be new issues in the future that, you know, we will learn things about the, the financial system will evolve, the banking system will evolve, there will be a need to evolve the capital framework. In light of that, you know, new issues will arise, and we in the United States will once again say, if we want to com, have a fair playing field on which to compete, there are some changes we need to make, and we want them to be made consistently. And if we have not implemented Basel 3, which was very much driven by the United States, we will walk into that room, and people will be much less willing to listen to us since we were the Lucy that pulled away the football the last time.

Mike, do you have anything you want to add?

Get it done. Get it done. Get it done. If you, and if, if you don't, then the cost of capital for banks would be higher than it otherwise would be. So I want to spend a little time. There's an entire panel about the stress test, and I don't want to steal their thunder, but I do want to talk a little bit about the interplay between Basel 3 endgame and the stress tests, and what the relationship should be. So, Sher, let me start with you. What should the relationship be between this?

Sure. Um, it's a great question, and it's, it's something that, you know, that gets a lot of discussion. Um, as I mentioned earlier, the US is unique in that the stress capital buffer is part of our pillar one requirements, or part of our ratio requirements. Um, and therefore requires a higher degree of sophistication when combining that with Basel 3 endgame, because you have everything that's been capitalized in the CAR stress test, and then you have things that are being capitalized for in Basel 3 endgame, many of whom are are double counts across them. So, in my mind, the most egregious example is operational risk. In the results that the Federal Reserve released last month on the CCAR stress test, they included $180 billion of capital associated with operational risk losses on the banks that participated. And so, therefore, that $180 billion has been capitalized for in the banks' ratios. When included in Basel 3 endgame, it reintroduces operational risk into the risk-weighted asset framework. Currently today, that only sits in the advanced ratio. So it's not part of the standardized ratio, which is the more binding ratio for the banks. And so included in Basel 3 endgame is operational risk risk-weighted assets. In the estimates that the banks provided in conjunction with the NPR, the amount of capital associated with those operational risk RWAs was around $150 billion. And for those that don't know, operational risk is, is capitalizing for generally it's legal losses. That's kind of the biggest driver, but it includes any sorts of cost associated with outages, um, world, you know, uh, climate-related events, etc. It's all captured in there. So, um, when you take the stress capital buffer loss of $180 billion plus Basel 3 endgame RWAs of operational risk, which is around $150 billion of capital, what the original proposal did is just put those two numbers on top of each other. And so the question that every constituent should ask is, what, why is it necessary for banks to hold $180 billion plus $150 billion of capital associated with operational risk? And if you look at history and just focus on the GIBs over the last 10 years, so decade, the GIBs legal losses has not been $180 billion. It's not been $150 billion. It's been less than a hundred billion. And that's over 10 years. The CCAR stress test is only nine quarters. And so I use that because again, I think it is the most egregious example. But you can look at market risk, you can look at CVA, you can look at lots of different components, and, and the, the challenge for the Federal Reserve is to look at what's being capitalized for in the stress capital buffer, which is unique, and what's being capitalized for in Basel 3 endgame, and making sure that they're not double counting things.

Randy, can you, the, the stress capital buffer was finalized under your watch at the Fed. Can you take us through why it's better than the CCB was and why it's needed now?

Um, uh, so I think that there are, uh, I think there are two parts of that answer. One is a legal part, sort of general legal principles part, and the other is a practical part. So, uh, before the stress capital buffer, and I hadn't realized this until I walked into, well, it wasn't this building. It was the one across the street, which now may never be built. But the, uh, the, the, um, uh, the, before the stress capital buffer, the outcome of the stress test, the practical outcome of the stress test depended on what the Board of Governors had had for breakfast on the morning it was presented to them. And that does not seem to be the right way to operate a regulatory system, uh, that's going to have such consequences for the regulated. So the basic legal principle, it seemed to me, was that, uh, the consequences of the stress testing process should be clear and concrete, uh, and, and, uh, measurable. They should be legal as opposed to entirely discretionary. Uh, and, and I should state that I'm a big fan of stress testing. During the COVID event, the fact that we had stress tests, and we ran seven stress tests in the United States during that period, allowed us to be very confident in the resilience of the banking system during that whole time, and allowed us to continue to allow our banks to pay out dividends when the rest of the world had suspended them. And our banks are benefiting from the lower cost of capital that comes from that predictability of return, even today, many years later. Um, so stress testing, good, uh, in general, uh, but there should be a predictable outcome. The practical side of the question to me for the SCB as well is that if it depends on what you have for breakfast, different people at different times have different breakfasts, uh, and the potential, uh, consequences of the same stress testing outcome, depending on the particular people who have been appointed to the Federal Reserve at any point in the future, could be dramatically different, uh, if you've left that open, you've essentially left it open to the vagaries of the political process if you don't have a concrete consequence for the outcome of the stress test. Over a long period of time, the Fed is a marvelously apolitical institution. As a citizen, I've been very, very pleased with my involvement with it to see how true that is. But, you know, but the people are appointed through a political process, and over a period of time, you could have significantly different outcomes for the industry. So, uh, so I think both for general legal principles of, you know, regulatory action should be subject to discipline, and the stress capital buffer makes it clear what that discipline is.

and uh uh you know and predictability of results over time. That that's that's how the that's how the outcome of the stress test should be implemented is through some sort of a stress capital buffer.

>> Mark, you look like you have something you want to >> Well, I just want to put an exclamation point uh for what Randy said. I mean, the stress having had the stress test in April 2020 or spring of 2023. We felt confident, I think a lot of investors felt confident that banks could withstand whatever was coming their way. The largest banks.

The if the agencies agree that the fundamental review of the trading book plus the GMS and the stress test hit bank trading books with excess aggregate capital requirements. What is the best path to reducing that surplus surplus? Should we soften the GMS or look to soften the FRTB domestically or in Basel? Sherry, you wanna I'm gonna I'm gonna volunteer you because you have the red light on your microphone.

>> I I heard FRTB and that's like magic to my ears. So, I figured I figured it was coming my way. My take away from Ry's uh uh talk as relates to how the SCBs are derived is that that I should have gone to culinary school um instead of becoming an accountant would have been better for Goldman Sachs. Um but but with that said um you know the FRTB and for those that don't know that stands for fundamental review of the trading book that's the market risk component of Basel 3 endgame and the global market shock or GMS which is included in the SECAR stress test is the instantaneous shock um to the trading businesses of of the largest banks. And so your question underlies the issue at hand which is that there's a duplication between how FRTB is shocking market risk and capital and requiring capitalizing for market risk um versus the GMS. Um and and and if you dig even deeper um they both kind of do it in a similarish framework. They're both looking at the same position set um and they're looking at tail risk. So they're shocking it to like the very tales in terms of how how um how those markets would be affected and then again in the original proposal on Basel 3 endgame stacked those two things on top of each other. And so to your question um you know to the extent as the Federal Reserve is looking to to repropose Basel 3 endgame as well as you know all the work that's being done on the SECAR process I think both stand to benefit from a really deep dive to ensuring that the shocks and the assumptions and liquidity horizons that are being used in them are consistent. And I'll use an example that I think highlights it. Um the GMS still uses assumptions from the financial crisis in terms of the level of shocks despite how far we are removed from the financial crisis and more importantly how much reform has happened since the financial crisis. So as an example using securitized product so this is the underwriting and packaging of mortgage related or assetbacked or CLLOs's taking all those assets together and issuing them as bonds. The shocks that the Federal Reserve applies in the most recent SECAR stress test, so the one that we just got the results of are equal to the shocks the banks, you know, those assets suffered during the financial crisis. What that doesn't account for is the fact that the LTVs of those um loans are significantly different. The FICO scores of the borrowers are significantly improved. And so the shocks are being applied to um bonds and assets that are much better underwritten or subject to much better underwriting relative to the products that were being traded in the financial crisis. And so I do think that the GMS is very ripe for that to get that overhaul because it really hasn't been addressed you know since it was first put in place. And one of the reason one of the ways in which you know the calibration is off is to the extent that you take an asset a securitized product and subject it to both FRTB and the GMS about 15% of the product that was underwritten last year. Banks would be required to hold more capital than the carrying value of that asset. So I would have a bond with a carrying value of hund00 million. And if I added FRTB and the GMS to it, I would capitalize that for 120 or $130. So the capital that I would hold is greater than the carrying value such that if I wrote that bond down to zero, I'd actually release capital. And so it's an example of where you can look at it quite simply and see that the calibration is off. And and as I mentioned, this isn't one or two bonds. This is 15% of the market that was underwritten last year.

So, one of the arguments that Treasury Secretary Scott Bessant brought up last night was talking about whether or not firms should be able to opt into Basel 3 endgame, those that are not covered by it. And I guess I want to get the panel's view on are there pros and cons to including them versus not allowing them to be included if they want to and what the system looks like. I'm a libertarian um and I'm nobody's mother. I mean, if they want to opt in, I actually I don't see a downside except potentially from the institution and that's theirs to judge.

>> Phil.

>> Yeah. So, um um so this is a question about whether you apply the rules to the uh to small banks. Um, so B Bar Basel 3.1 was agreed internationally, so clearly applies to the largest banks. Uh, I've argued that it's better than what we have now. So I think you'd want to apply it to mid midsize banks for us. The question is, do you apply it to the very smallest banks? Um, and so so in the UK, we've long wanted to have a kind of um a more proportionate regime for smaller banks. And now that we have um left the EU and we can write our own rule book, we've we've we've been working on that. So we call it strong and simple um in homage to Mike. Um and uh so we had to decide whether to take pillar one from Basel 3.1 and give it to the uh give it to the very smallest banks. In the end, we decided we would because because we just felt it was better. We felt it enabled them to compete more. The caveat was that where we saw that there were parts of the new Basel framework where they just didn't need the rules because they didn't do much of it like trading trading book rules, CVA C counterparty credit risk, all of that kind of stuff. We said you don't do much of that. That's how you got into the strong and simple regime. And so you don't need um and so you don't need to worry about those rules. So we carve them out of that. But the rest of it we did. So we have um I think it is possible to give the reg um to give the pillar one to smaller banks and and I do think they would benefit from it.

>> The one of the things in my my former life when I was editor at American Banker we used to talk a lot about capital standards always inadvertently pushing banks out of different activities. So, you know, have can you talk about the extent to which the there there are dangers in Basel 3 endgame of doing that versus, you know, how can we morph capital requirements to bring some of the activities that were in the past possibly pushed out by these capital requirements back into the system?

>> Um, I I'm happy to start and others can can weigh in. Um, I think that your question is 100% right and we've seen it time and time again. um no matter how big or how small the rule is um as the capital framework continues to evolve you're you're able to pretty clearly see the impact of what it does to the broader market as a result. So when you know mortgage lending related requirements were goldplated you immediately thereafter saw an uptick in the amount of mortgages being underwritten outside of the banking system. You know, most recently in the implement in the implementation of Sacker, which is the counterparty credit capitalization requirements, which is actually part of the Basel 3 endgame, um those rules changed the capitalization for shortdated derivative hedging. And as soon as that rule came into play, you started to see that activity move outside of the regulated banking system. Um and so that's that unintended consequence um of the amount of activity kind of almost immediately responding. I mean you even see it in SECAR shocks where if in a particular year the Federal Reserve shocks are more punitive to something specific from an asset class perspective, you will see banks will do less of that and it will move outside of the bank regulated banking system. And so that's that's something that needs to be really um uh carefully thought about in conjunction with all the components of the capital framework um that the Federal Reserve is looking at um whether it's uh the stress test or Basel 3 endgame or GIB um that to the extent that you're increasing the capital requirements on particular products um with for the most you know the most highly regulated banks um that activity will go somewhere and it will go out to the less transparent outside of the banking system.

>> Randy,

>> yeah, I I do think that that is something that has um here to for um across, you know, a broad range of eras and people um uh and regimes been given insufficient attention in thinking about bank regulation. uh is that especially in the United States, but now really even very substantially globally, it's an it's a financial system. It's not just a banking system. And if we adopt um regulations that are going to push something out of the banking system, uh it will go elsewhere. We will not really constrain that activity. You have to think and and the and and we will push it into uh either parts of the financial system that are less transparent and less well capitalized or jurisdictions um that are less transparent and in within the banking system that are less transparent and less well well capitalized. So um and and there really has not been sufficient attention I think given to that um holistic um view. You know uh the growth of private credit in the first in

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