U.S. Sens. Elizabeth Warren (D-MA), Andy Kim (D-NJ) and Lisa Blunt Rochester (D-DE) urged the Federal Reserve’s Vice Chair to oppose special treatment of European banks when calculating risk scores.
In a letter to Michelle Bowman, Federal Reserve Vice Chair for Supervision and Chair of the Financial Stability Board’s (FSB) Standing Committee on Supervisory and Regulatory Cooperation, the senators said giving European global systemically important (GSIBs) special treatment created competitive disadvantages for American banks.
The scores determine how much additional loss-absorbing capital these big banks must fund themselves with to limit their likelihood of failure. The FSB’s Basel Committee on Banking Supervision has produced systemic risk scores for GSIBs since the 2008 financial crisis to promote the stability of the global financial system.
“In 2022, the Basel Committee announced that European GSIBs would receive special treatment when calculating the international activity portion of the methodology,” the senators, all members of the Senate Banking Committee, wrote. “Instead of accounting for bank loans and other financial exposures between European countries as international activity, European GSIBs were allowed to treat two-thirds of these exposures as merely domestic activity. Relaxing this requirement reduces the systemic risk score for European GSIBs.”
The senators, led by Warren, the ranking member of the committee, criticized the Basel Committee’s decision to increase the risks posed by European banks without a public comment process.
“Europe does not yet have a unified deposit insurance framework, nor a mechanism to provide liquidity in periods of banking stress. In addition, this change was executed behind closed doors in violation of the Basel Committee’s charter, which commits to seeking input ‘from all relevant stakeholders on policy proposals’ by ‘issuing a public invitation to interested parties to provide comments in writing,” the wrote.
The letter urged the FSB to opt to not renew the special treatment of the GSIBs for another year, and asked Bowman to answer questions about the FSB’s justification for the European GSIBs preferential treatment, by Nov. 14.