Fed Chair Yellen Questioned on US Implementation of Basel’s FRTB Rule

This morning, February 10th, Federal Reserve (“Fed”) Chair Janet Yellen, testified before the House Financial Services Committee and presented the Fed’s semiannual Monetary Policy Report. During her testimony, Congressman Andy Barr (R-KY) questioned Chair Yellen about the Fed’s plans to implement Basel’s recently finalized rule in the U.S. that sets capital standards for securitization exposures on bank trading books, called the Fundamental Review of the Trading Book. Specifically, Congressman Barr asked:

The Basel Committee recently finished a rule in January that increases the capital held against securitization exposures in a bank trading book by up to five times the amount already required under Basel III, as well as the final TLAC rules. One industry study suggests that that trading in U.S. asset-backed securities will become uneconomical if the rule is not tailored to fit the U.S. marketplace. If it is uneconomical to act as a “market-maker” for commercial mortgage-backed securities, residential mortgage-backed securities, auto loans, credit cards, CLO’s, then banks will pull out of the ABS market, which represents a $1.6 trillion dollar source of consumer lending, or 30% of all lending to U.S. consumers. So my question to you Chair Yellen is, how will the Fed ensure that the final rule will be tailored to fit the U.S. market, which is the most liquid ABS market in the entire world?

 “I will have a careful look at that. I am not familiar with all of the details in the Basel proposal, but anything we implement in the United States – there is nothing automatic that is implemented in the United States – and we will have a careful look at that rule,” responded Chair Yellen.

 “I appreciate you doing that, and I will continue to push you and other members of the FSOC to look at regulations for sources of economic instability,” stated Mr. Barr.

SFIG will continue to present its members’ views and insights to Congress on matters affecting ABS bond liquidity. To view a recording of the hearing, please click here (FRTB Question at 2:58:20). To view SFIG’s letter to the regulators on FRTB, please click here. To learn more about SFIG’s advocacy efforts, please contact Michael.Flood@sfindustry.org

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