Bank Capital Rules and Basel III Endgame Cited as Constraint on Dealer Liquidity
April 09, 2025 | Financial Services: House Committee, Standing Committees - House & Senate, Congressional Hearings Compilation
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Multiple witnesses told the task force that non‑risk‑sensitive capital measures are constraining dealers' ability to intermediate Treasury trades, particularly in stress periods, and that proposed Basel III "endgame" changes could exacerbate the problem.
Tom Whiff, who led the Treasury Market Practices Group, and Scott O'Malia of ISDA pointed to the supplementary leverage ratio (SLR) as a principal driver of reduced dealer balance‑sheet capacity. Whiff said, "The SLR and other leverage requirements are intended to be risk agnostic backstops to risk based capital requirements. However, they can create binding constraints for some large dealer banks reducing their capacity to intermediate the treasury markets." O'Malia argued the SLR should be modified so banks have capacity "to provide intermediation and client clearing services" and noted the Federal Reserve temporarily excluded Treasuries from the SLR calculation in April 2020 during the pandemic.
Witnesses also criticized aspects of the Basel III endgame and the GSIB surcharge, saying some proposed calibrations would inappropriately raise capital charges for client clearing and trading book exposures. O'Malia cited industry analysis claiming the Basel proposals could increase capital on U.S. GSIB client clearing businesses by more than 80 percent, a change he described as potentially punitive and misaligned with the policy goal of promoting central clearing.
Panelists recommended several policy responses: (1) consider a permanent SLR exclusion or adjustment for central bank reserves (with no net reduction in total bank capital), (2) re‑calibrate the Basel endgame trading book rules and GSIB surcharge to reflect actual risk, and (3) ensure cross‑product netting and margin offsets apply to client clearing to avoid overstating client exposures.
Ending: Committee members and witnesses agreed capital and margin rules should be reviewed in a coordinated manner across agencies to prevent regulatory mismatches that could weaken market liquidity when dealer intermediation is most needed.
Tom Whiff, who led the Treasury Market Practices Group, and Scott O'Malia of ISDA pointed to the supplementary leverage ratio (SLR) as a principal driver of reduced dealer balance‑sheet capacity. Whiff said, "The SLR and other leverage requirements are intended to be risk agnostic backstops to risk based capital requirements. However, they can create binding constraints for some large dealer banks reducing their capacity to intermediate the treasury markets." O'Malia argued the SLR should be modified so banks have capacity "to provide intermediation and client clearing services" and noted the Federal Reserve temporarily excluded Treasuries from the SLR calculation in April 2020 during the pandemic.
Witnesses also criticized aspects of the Basel III endgame and the GSIB surcharge, saying some proposed calibrations would inappropriately raise capital charges for client clearing and trading book exposures. O'Malia cited industry analysis claiming the Basel proposals could increase capital on U.S. GSIB client clearing businesses by more than 80 percent, a change he described as potentially punitive and misaligned with the policy goal of promoting central clearing.
Panelists recommended several policy responses: (1) consider a permanent SLR exclusion or adjustment for central bank reserves (with no net reduction in total bank capital), (2) re‑calibrate the Basel endgame trading book rules and GSIB surcharge to reflect actual risk, and (3) ensure cross‑product netting and margin offsets apply to client clearing to avoid overstating client exposures.
Ending: Committee members and witnesses agreed capital and margin rules should be reviewed in a coordinated manner across agencies to prevent regulatory mismatches that could weaken market liquidity when dealer intermediation is most needed.
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