US regulators should not back off


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Just ten years after the crisis, banks' confidence about regulatory easing is worrying


How safe do US banks feel?

The financials of the biggest look good; there is more capital underpinning the system than before the crisis; stress tests are now into their eighth year and bank CEOs tell analysts and shareholders that all the tiresome scenarios they must work through are making the system ever safer. And so they would.

But looking at the latest round of stress-test results and listening to the latest round of quarterly results conference calls, you might be forgiven for feeling a twinge of unease.

There is a palpable change in tone, a new confidence that the more annoying regulatory proposals will inevitably be watered down once authorities have taken on board the good sense fed back to them in comment periods.

The Federal Reserve has just allowed Goldman Sachs, Morgan Stanley and State Street – all three of which failed to hit minimum capital levels in the most recent stress tests – not only to reach compliant levels organically rather than having to go to market, but even to continue payouts to shareholders.

Meanwhile, the stress capital buffer (SCB) – originally mooted in late 2016 and still tentatively scheduled to be brought in by the end of 2019 – looks ever more likely to be watered down.

As originally proposed, it would make capital requirements higher and, more controversially, much more volatile than now. Banks appear keen to use the new atmosphere of regulatory easing in the US to temper its effects, nominally with the objective of removing the volatility that, they say, cannot have really been intended. 

It remains to be seen how much of the buffer’s spirit survives the horse-trading.

And it’s not just stress tests. Leveraged lending volumes are up and banks are making more money from it. In itself, it’s not absolute proof that the weakening of leveraged lending restrictions in the US is already feeding through to underwriting, but it’s surely not a stretch to imagine it might be.

Why even bother setting minimums if it is not going to hold the banks to them? 
 - CreditSights

Mid-sized US banks, meanwhile, have recently been released from certain prudential obligations as the definition of a systemically important financial institution moves up to $250 billion of assets from just $50 billion.

Each individual piece of this jigsaw has its own context, its own rationale and, in isolation, might not be misguided, but when put together, a mere 10 years on from a colossal crisis, does there seem to be something wrong with this picture?

It has bothered analysts at CreditSights sufficiently for them to start to highlight an “erosion of […] post-crisis regulatory standards”. The proximate trigger for their worry was the leniency on comprehensive capital analysis and review (CCAR) minimums.

As the analysts ask of the Fed: “Why even bother setting minimums if it is not going to hold the banks to them?” Few things erode trust in a system more than regulators setting rules and then not enforcing them.


On many measures, banks are safer than they were, but to hear bankers talk so confidently of their expectation for increasing regulatory leniency is disturbing – even if there is a sensible dialogue to be had on whether more volatile capital requirements are appropriate.

Morgan Stanley CEO James Gorman was right when he told analysts in July that leverage ratios were a blunt instrument. As he notes, which bit of your balance sheet that leverage is being applied to matters rather more than group-wide aggregate numbers.

But that doesn’t change the fact that as the financial world approaches the 10th anniversary of the collapse of Lehman Brothers, regulators are already backing off.

Yes, some burdens on banks remain far, far higher than pre-crisis, but the steady drip of lobbying will erode regulation as surely as raindrops bore through rock.