ICBA Policy Resolutions for 2013
ICBA Priorities for 2013

SYSTEMIC RISK / SUPERVISION / RESOLUTION AUTHORITY

Position

• ICBA supports FDIC Vice Chairman Tom Hoenig’s proposal for restructuring the banking system that would restrict banks to the core activities of making loans and taking deposits and prohibit them from engaging in market making, brokerage and proprietary trading.
  
  
• Banking institutions with $50 billion or more in assets and systemically important nonbank financial companies (SIFIs) should be subject to enhanced prudential standards including higher capital, leverage, liquidity standards, and concentration limits and to contingent resolution plans. ICBA supports a significant capital surcharge on SIFIs that would not be less than what was proposed by the Basel Committee for G-SIFIs—a progressive common equity tier 1 capital requirement of between 1% to 2.5%, depending on the bank’s systemic importance.
  
  
• FSOC’s process for identifying SIFIs should be accelerated and should include as many large or interconnected nonbank financial firms as possible including large investment banks, insurance companies, hedge funds, private equity funds, venture capital firms, mutual funds, industrial loan companies, special purpose vehicles, and nonbank mortgage origination companies.
  
  
• ICBA generally supports the Volcker Rule prohibiting proprietary trading and limiting investment in and sponsorship of hedge funds and private equity funds by banking companies. However, the proposed rule should limit its impact to those entities that engage in proprietary training or sponsor hedge funds and private equity funds and should not require community banks to update or revise their compliance plans.
  
  
• ICBA supports the orderly liquidation rules of the FDIC and the provisions of the Dodd-Frank Act that provide a process for the appointment of the FDIC as receiver of a failing financial company that poses significant risk to the financial stability of the United States. ICBA also supports the FDIC’s and the Federal Reserve’s rules on contingent resolution plans.
  
  
• The provisions of the Dodd-Frank Act that allow for the downsizing of those institutions that pose the most systemic risk to our economy should be implemented to allow regulators broad discretion to exercise this authority.

Background

ICBA Supports Hoenig Proposal. ICBA supports FDIC Vice Chairman Tom Hoenig’s proposal for restructuring the banking system. Under the Hoenig proposal, banks would be restricted to the core activities of making loans and taking deposits and would be prohibited from engaging in dealing and market making, brokerage, and proprietary trading. In addition, banking organizations would be prohibited from holding “complicated” securities such as multilayer structure securities (e.g., CDOs) because of the difficulty determining and monitoring their credit quality. The Hoenig proposal would better align the interests of banks and their customers. Trading activities can set up a conflict of interest between a bank and its customers. The proposal would reduce risk among large financial institutions and the shadow banks and improve overall stability in the financial system.

Enhanced Prudential Standards. Banking institutions with $50 billion in assets or more and those systemically important nonbank financial companies (SIFIs) should be subject to enhanced prudential standards including higher capital, leverage, liquidity standards, counterparty exposure limits, concentration limits and to contingent resolution plans. The Federal Reserve should require a SIFI surcharge of at least 1-2 ½ percent calibrated based on the size and complexity of the institution. This would not only give the megabanks an extra capital cushion to help them survive another economic meltdown, but would discourage them from getting any larger and more interconnected, and would mitigate, to some extent, the substantial funding advantage that the “too-big-to-fail” banks now have over community banks. SIFIs should also be subject to minimum tier one leverage ratio of 6%.

Identification of Nonbank Financial SIFIs and Office of Financial Research. FSOC has been slow about identifying those nonbank financial institutions that are SIFIs. Not one nonbank financial institution has yet been identified. The process needs to be significantly accelerated so that all the SIFIs are identified and are subject to enhanced supervision and regulation by the Federal Reserve. The process should be sufficiently broad to include as wide a range of nonbank financial firms that pose systemic risk to the financial system as possible. Any company that is “predominantly engaged in financial activities” as the Dodd-Frank Act defines that term should be considered if its failure or material financial distress could cause financial instability in the United States.

Volcker Rule. ICBA generally supports the Volcker Rule which is an important step toward protecting the fundamental business of banking from the speculation inherent in proprietary trading and sponsoring or investing in hedge funds or private equity funds. Banks are accorded access to federal deposit insurance and liquidity facilities because they serve a public purpose: Facilitating economic growth by intermediating between savers and borrowers, i.e., taking deposits and making loans, and by maintaining liquidity in the economy throughout the economic cycle. These activities constitute the fundamental business of banking. In contrast, proprietary trading and certain hedge fund and private equity fund activities are conducted for the sole purpose of generating profits for the bank’s owners and are not related to the entity’s banking activities or to providing services to customers. As a result, banks engaged in these activities face numerous conflicts of interest.

ICBA also generally supports the proposal to implement the Rule made by the banking agencies. However, the proposed rule is complicated, requiring significant disclosures and compliance by those firms subject to the proposal. Final regulations implementing the Volcker Rule should limit its impact only to those entities that engage in proprietary trading or sponsor hedge funds and private equity funds and should not require community banks to update or revise their compliance plans.

FDIC as Receiver and Funeral Plans. ICBA supports the orderly liquidation rules of the FDIC and the provisions of the Dodd-Frank Act that provide a process for the appointment of the FDIC as receiver of a failing financial company that poses significant risk to the financial stability of the United States. ICBA also supports the FDIC’s and the Federal Reserve’s rules requiring insured depository institutions with $50 billion or more in total assets to submit contingent resolution plans that enable the FDIC, as receiver, to resolve the institution under the Federal Deposit Insurance Act. It is essential that the largest financial companies submit credible contingent resolution plans that will facilitate a rapid and orderly resolution of the company and will describe how the liquidation process can be accomplished without posing systemic risk to the public and the financial system. If the company cannot submit a credible plan, the FDIC and the Federal Reserve should exercise their authority under the Dodd-Frank Act to order a divestiture of those assets or operations that might hinder an orderly resolution.

Authority to Break Up Systemic Risk Institutions. Under the Dodd-Frank Act, when the Federal Reserve determines that a systemically risky nonbank or bank holding company poses a “grave threat” to financial stability, with an affirmative vote of two-thirds of the FSOC, the Federal Reserve may compel the firm to cease or restrict activities, limit mergers or acquisitions, or, as a last resort, forcibly divest assets. This provision should be implemented to allow regulators broad discretion to exercise this authority.

Staff contact: Chris Cole

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