HOUSE FINANCIAL SERVICES COMMITTEE
HEARING ON CAPITAL PROPOSALS
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On April 28, the House Committee on Financial Services held a hearing entitled, “Prioritizing Main Street: Evaluating the Impact of Capital Proposals on Economic Growth and American Communities.” The witnesses in the hearing were:
- Greg Baer, President & Chief Executive Officer, Bank Policy Institute
- Luigi De Ghenghi, Partner, Davis Polk & Wardwell LLP
- Reggie Griffith, Global Head of Regulatory Compliance, Louis Dreyfus Company, on behalf of the Commodity Markets Council
- Mayra Rodriguez Valladares, Managing Principal, MRV Associates
- Robert Broeksmit, President & Chief Executive Officer, Mortgage Bankers Association
Below is a summary of the hearing prepared by Delta Strategy Group, which includes several high-level takeaways, followed by summaries of opening statements and discussion.
Key Takeaways
- Multiple Republican Representatives expressed support for the 2026 Basel III proposal as a significant improvement over the 2023 proposal. Representative Lucas (R-OK), among others, praised the 2026 proposal for better tailoring requirements to risk, increasing transparency, and realigning U.S. standards with the 2017 Basel agreement.
- Representatives Lucas and Davidson (R-OH) raised concerns about the impact of bank capital requirements on agricultural and energy end users’ access to futures markets and clearing capacity. Griffith stated that the futures market is the primary tool the agricultural sector uses to manage risk, and that if bank capital requirements are overly burdensome, the ability of bank-owned futures commission merchants (FCMs) to provide clearing capacity could be reduced or their costs could increase, with those costs flowing down to merchants, producers, and U.S. consumers. He further warned that such requirements could drive banks to exit the FCM business altogether or discourage new entrants.
- Representative Davidson asked about Basel-imposed mandates on U.S. markets, and Griffith noted that since Dodd-Frank, the U.S. has done a fantastic job and is the benchmark for all futures exchanges globally. He added that the U.S. should look at its own needs rather than mimicking other regimes that have not performed as well.
- Representative Lucas raised the issue of cross-margining, noting that as the Treasury market moves to central clearing under the Securities and Exchange Commission (SEC) clearing implementation, margin demands will increase significantly, making cross-margining across Treasury repo and Treasury futures very important. Baer noted that under current bank rules, banks do not receive credit for cross-margining, even though there is a risk-reduction benefit when netting those trades.
- Griffith drew a distinction between the 2026 and 2023 Basel proposals as they relate to agricultural markets. He stated that the 2023 proposal would have pushed hedging activity and liquidity away from the cleared model, reduced clearing capacity, and significantly increased the cost of using the futures markets, collectively increasing risk and costs throughout the agricultural sector. Griffith added that the 2026 proposals take a more balanced approach that serves essential requirements of the agricultural sector, adding safeguards without impairing market liquidity or clearing capacity.
- Griffith noted that the futures markets have been tested repeatedly since Dodd-Frank and have worked well. He cautioned against overly burdensome controls that would lead to unnecessary consequences across the agricultural sector. Representative Vargas (D-CA) noted that Griffith’s praise for the post-Dodd-Frank regime may draw a reaction from colleagues. Griffith responded that, relatively speaking, given where the markets were before and where they are now, he would take the U.S. post Dodd-Frank futures market regime over any other in the world.
- Multiple witnesses and members raised concerns about the double-counting of operational and market risk between the Basel III standardized approach and the Fed stress tests. De Ghenghi and Baer both explained that because operational risk was added to the standardized approach (SA) after previously only being captured in stress testing, and because the Fundamental Review of the Trading Book (FRTB) now captures the same tail risks as the Fed’s global market shock, banks could be required to hold capital twice for the same risks. Baer noted that while the agencies have acknowledged the overlap, it remains to be seen whether proposed changes to stress testing models will fully resolve the double-counting on an ongoing basis.
SUMMARY
Opening Statements and Testimony
Committee Vice Chairman Huizenga (R-MI)
Capital requirements should promote investment, not compound on one another, or impose capital levels well above what actual risk warrants. The 2023 proposal contained requirements that diverged significantly from global standards, placing U.S. financial institutions at a disadvantage. This revised framework takes steps to realign U.S. requirements with international norms. The prior administration’s proposal would have had significant consequences for bank securities underwriting, hedging, securitization, and equity investments in funds. The revised proposal does more to ensure that banks continue their crucial work as intermediaries that allow risk to flow to those most able to manage it. It is Congress’s responsibility to ensure these proposals are clear, appropriately targeted, and do not create unintended consequences that could ripple through the economy.
Subcommittee on Financial Institutions Chairman Barr (R-KY)
The Committee was clear that the original 2023 proposal lacked sufficient economic analysis, failed to account for overlapping requirements, and risked unnecessary disruptions to essential bank lending and capital markets activities. These proposals reduce unnecessary complexity and gold plating that put U.S. banks at a competitive disadvantage.
Ranking Member Foster (D-IL)
The prudential regulators have seemingly taken to heart some of the bipartisan concerns that were raised about the 2023 proposals. We cannot ask whether these proposals are better than what came before. We must ask when taken together if they will strengthen financial stability, support access to credit, and prepare us for what lies ahead. The growing connections between banks and private markets mean regulators must account for all these risks before they become systemic.
Reggie Griffith, Louis Dreyfus Company, on behalf of the Commodity Markets Council
Futures markets allow commercials to offer fair and competitive pricing to producers and end users while also serving as key risk-management intermediaries. The agricultural sector needs two fundamental elements from the futures markets, both of which could be affected by the proposed bank capital rules. Liquid and well-functioning futures markets supported by robust risk controls and sufficient clearing capacity for the agricultural sector to manage risk at a reasonable cost. The 2026 capital proposals take a more balanced approach than the 2023 proposals and serve both essential requirements, allowing the agricultural sector to continue using the futures markets as it does today. The 2023 proposal would have pushed hedging activity and liquidity away from the cleared model, reduced clearing capacity, and significantly increased the cost of using the futures markets. Those outcomes would have increased risks and costs across the agricultural sector, leading to less income for producers and higher food prices for U.S. consumers. Bipartisan efforts to strengthen risk controls since the financial crisis have been a tremendous success. Volume in these markets has increased significantly, and they have demonstrated resilience during periods of extreme volatility, making U.S. commodity markets the global benchmark. The 2026 proposals add safeguards without impairing these markets. The 2023 proposals would have driven liquidity away from regulated, transparent markets back toward less standardized over-the-counter activity. On clearing capacity, to access the futures markets, commercials generally must transact through a FCM. Due to their trading size, large commercials are typically limited to using bank-owned FCMs, most of which are directly affected by the proposed bank capital rules. If bank-owned FCMs are subject to overly burdensome capital requirements, the result would be reduced clearing capacity and higher clearing service costs. In some cases, such requirements would drive banks to exit the FCM business altogether or clearly discourage new entrants. This would constrain the ability of commercials to hold position sizes necessary to properly manage risk and would significantly raise costs, impacts that would ultimately be felt throughout the agricultural and food sector. The 2026 proposals support the long-term viability of the agricultural markets while striking a balance between strengthening safeguards and preserving market liquidity and clearing capacity.
Greg Baer, Bank Policy Institute
The capital proposals being reviewed by the Committee reflect a new and careful approach to capital regulation. The agencies focus on risk-assessed assets by asset and show their work. The result will be a capital regime that better reflects risk with substantial benefits to U.S. economic growth.
Luigi De Ghenghi, Davis Polk & Wardwell
For credit and counterparty credit risk, the proposed rules are an overdue modernization of the standardized approach to calculating risk-weighted assets (RWAs) and bank capital ratios, intended to make them more accurately reflect the risks of various exposures. Instead of applying a single risk weight to a category of exposure, they would apply a range of risk weights that depend on factors measuring the relative degree of risk. The 2026 version of the proposed rules, compared to the 2023 version, is better at avoiding add-ons to the internationally agreed Basel standards and at tailoring the rules to better fit the characteristics of the U.S. banking sector.
Robert Broeksmit, Mortgage Bankers Association
The new proposal is meaningfully better than the current bank capital framework and the proposed revisions in 2023 that would have caused serious disruption to both residential and commercial real estate markets.
Mayra Rodríguez Valladares, MRV Associates
The agencies released three notices of proposed rulemaking that would collectively reduce capital requirements at the nation’s largest banks by nearly five percent. Capital should be designed to help banks survive unexpected losses so taxpayers do not have to bail them out.
DISCUSSION
Representative Lucas (R-OK): Should U.S. capital requirements be revised to recognize the risk-reducing benefits of cross-margining, particularly across Treasury cash, repo, and futures markets, so that margin and capital treatment more accurately reflect hedged portfolio risk as central clearing in the Treasury market is implemented under SEC rules? Baer: It is a significant development that the Treasury market is moving to central clearing. When it does, margin demands will increase significantly. Cross-margining between Treasury repo and Treasury futures will become important to reduce the required margin and enable that market to function. The SEC has taken actions to allow that from their perspective under their rules, but currently, under the bank rules, you do not get credit for that cross-margining. There is some basis risk in those trades, but it is not the case that you are not getting a risk reduction benefit when you are doing netting across those trades.
Representative Lucas: What does it mean for agricultural and energy end users if banks reduce their intermediation activity due to an incomplete recognition of hedging practices? Griffith: This is the biggest concern for the agriculture and energy industry. The futures market is the key to managing risk, and when risk is managed appropriately, it can lead to better prices for farmers, end users, and U.S. consumers. If the ability to deploy the risk needed to properly manage businesses is constrained, it will inject risk and cost into the system, lead to less money for farmers, higher prices for U.S. consumers, and unnecessarily inject risk throughout the entire food chain.
Representative Sessions (R-TX): Regarding the agriculture and food sector, what additional ideas do you have to support market stability? Griffith: The markets are working, specifically the futures markets, which are where the agricultural sector manages its risk. After Dodd-Frank, everyone worked together to put robust controls in place that have stood the test of extreme volatility. We need to be very cautious about implementing overly burdensome controls that will only lead to unnecessary consequences across the agricultural sector. When overly burdensome controls are put in place, they will lead to higher costs in the system, less money for farmers, and higher prices for U.S. consumers. Every time you add more controls, you must consider the downside. We do not need to go overboard with additional controls, as there are many unintended consequences that people are not looking for.
Representative Davidson (R-OH): Given that Basel-aligned capital requirements appear to have constrained economic performance in Europe, should the U.S. continue to look to the Basel Committee for regulatory guidance, or should it prioritize a framework tailored to the needs and strengths of U.S. markets? Griffith: Since Dodd-Frank, U.S. futures markets have become the benchmark for all futures exchanges globally. We need to look at our own needs and not necessarily try to mimic other regimes that have not done the job we have in the futures markets.
Representative Rose (R-TN): If bank capital rules were to significantly increase the cost of providing clearing, what specific risks do you see for liquidity and reliability of agricultural futures markets, and how could that ultimately affect producers and end users? Griffith: The biggest concern would be that the agricultural sector is not able to fully manage its risks. As bank capital requirements increase, access to clearing could be limited. That leads to not only higher prices but more risk that is pushed down the food chain. Farmers do not want to have to hold unnecessary risk, and if bank capital is overly burdensome, they will have to hold a lot more risk than they do today. If costs go up, the large commercials can absorb some of that, but it will flow down to farmers, and margins are very thin in the farming community. The 2026 proposal is a nice balance between the two. There are additional safeguards, but it is a balance that would not be burdensome on the agriculture community or farmers.
Representative Fitzgerald (R-WI): How do the revised capital proposals, particularly changes to risk weights and the treatment of trading activities, improve banks’ ability to provide hedging and risk management services to producers, farmers, and commercial end users? Griffith: The majority of the risk in the futures market must flow through an FCM. A lot of that sits with big bank FCMs. If you increase capital there, their ability to clear could decline, and you could have people leave the industry, which would inject risk into the system. Costs could go up, and that will flow down to merchants, producers, end users, and ultimately U.S. consumers.