April 5, 2019

Via e-mail to:

Office of the
Comptroller of the Currency

Board of Governors of
the Federal Reserve System

Federal Deposit
Insurance Corporation

Comments on the Proposed Joint Rule on “Regulatory Capital Treatment for
Investments in  Certain Unsecured Debt
Instruments of Global Systemically Important U.S. Bank Holding Companies, Certain
Intermediate Holding Companies, and Global Systemically Important Foreign
Banking Organizations”

OCC: Docket ID OCC-2018-0019; RIN 1557-AE38

              Board: Docket No. R-1655; RIN 7100-AF43

              FDIC: RIN 3064-AE79

Dear Sirs and Mesdames:

Thank you for the opportunity to comment on this
proposed joint rule.

In my view, the logic of the proposal is
impeccable.  Because it is, it should be
applied to another, parallel situation, as discussed below.  The proposal’s objective, “to reduce
interconnectedness and contagion risk among banks by discouraging banking
organizations from investing in the regulatory capital of another financial
institution,” makes sense, but might be improved by adding, “or if such
investments are made, to ensure that they are adequately capitalized.”

I believe another rule with exactly the same logic
and exactly the same objective is required to address a key vulnerability of
the U.S. banking system.  That is to
apply the logic of the proposed rule to any investments made by U.S. banks in
the equity securities of Fannie Mae and Freddie Mac, two of the very largest
and most systemically risky of American financial institutions.  As you know, hundreds of American banks took
steep losses on their investments in the preferred stock of Fannie and Freddie
when those institutions collapsed, and such investments caused a number of
banks to fail.  That banks were able to
make these investments on a highly leveraged basis was, in my judgment, a
serious regulatory, as well as management, mistake.  On top of this, U.S. regulations allowed
banks to own Fannie and Freddie securities without limit.

Banks were thus encouraged by regulation to invest
in the equity of Fannie and Freddie on a hyper-leveraged basis, using insured
deposits to fund the equity securities. 
Hundreds of banks owned about $8 billion of Fannie and Freddie’s
preferred stock.  For this disastrous
investment, national banks had a risk-based capital requirement of a mere 1.6%,
since changed to a still inadequate 8%. 
In other words, they owned Fannie and Freddie preferred stock on margin,
with 98.4%, later 92%, debt. (With due respect, your broker’s margin desk
wouldn’t letyou do that.)

In short, the banking system was used to double leverage
Fannie and Freddie, just as the investments in TLAC debt addressed by the
proposal would otherwise double-leverage big banks.  To analogously correct the systemic risk, when
banks own Fannie and Freddie equities, they should have a dollar-for-dollar
capital requirement, so that it really would be equity from a consolidated
system point of view.

I respectfully recommend, true to the principle
and the logic of the proposed joint rule, that any investments by a bank in the
preferred or common stock of Fannie and Freddie should be deducted from its
Tier 1 regulatory capital.  I believe
this should apply to banks of all sizes.

These are my personal views.  It would be a pleasure to provide any further
information or comments which might be helpful.

Thank you for your consideration.


Alex J. Pollock

Alex J. Pollock

Distinguished Senior Fellow

R Street Institute

1212 New York Ave. NW, Suite 900

Washington, DC 20005


[email protected]

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