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115th Congress   }                                       {      Report
                        HOUSE OF REPRESENTATIVES
 2d Session      }                                       {     115-656

======================================================================



 
       PENSION, ENDOWMENT, AND MUTUAL FUND ACCESS TO BANKING ACT

                                _______
                                

 April 26, 2018.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 2121]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 2121) to require the appropriate Federal banking 
agencies to revise regulations to specify that certain funds 
shall not be taken into account when calculating any 
supplementary leverage ratio for custodial banks, and for other 
purposes, having considered the same, report favorably thereon 
with amendments and recommend that the bill as amended do pass.
    The amendments are as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Pension, Endowment, and Mutual Fund 
Access to Banking Act''.

SEC. 2. TREATMENT OF FUNDS DEPOSITED WITH A CENTRAL BANK IN CALCULATING 
                    THE APPLICABLE SUPPLEMENTARY LEVERAGE RATIO.

  (a) In General.--The funds of a custody bank that are deposited with 
a central bank shall not be taken into account when calculating the 
applicable supplementary leverage ratio for the custody bank.
  (b) Limitations.--
          (1) Amounts.--The amount of funds described under subsection 
        (a) shall be limited to--
                  (A) the total value of deposits of the custody bank 
                linked to fiduciary or custodial and safekeeping 
                accounts; or
                  (B) an amount that is greater than a percentage 
                specified by the appropriate Federal banking agency of 
                the total leverage exposure of the custody bank, based 
                on considerations such as the potential impact on the 
                safety and soundness of the custody bank and the 
                ability of the custody bank to continue to accept cash 
                deposits from customers that are linked to fiduciary or 
                custodial and safekeeping accounts.
          (2) High-quality central bank requirements.--Subsection (a) 
        only applies to central banks that are high-quality central 
        banks, including--
                  (A) the Federal Reserve System;
                  (B) the European Central Bank; and
                  (C) central banks of member countries of the 
                Organisation for Economic Co-operation and Development, 
                if--
                          (i) the central bank of such member country 
                        has been assigned a zero percent risk weight 
                        under the final rules titled ``Regulatory 
                        Capital Rules: Regulatory Capital, 
                        Implementation of Basel III, Capital Adequacy, 
                        Transition Provisions, Prompt Corrective 
                        Action, Standardized Approach for Risk-weighted 
                        Assets, Market Discipline and Disclosure 
                        Requirements, Advanced Approaches Risk-Based 
                        Capital Rule, and Market Risk Capital Rule'' 
                        (78 Fed. Reg. 62018; published Oct. 11, 2013, 
                        and 79 Fed. Reg. 20754; published April 14, 
                        2014); and
                          (ii) the sovereign debt of such member 
                        country is not in default or has not been in 
                        default during the previous five years.
  (c) Regulations.--Not later than 60 days after the date of the 
enactment of this Act, the appropriate Federal banking agencies shall 
revise applicable regulations to carry out this Act.
  (d) Definitions.--For purposes of this section:
          (1) Appropriate federal banking agency.--The term 
        ``appropriate Federal banking agency'' has the meaning given 
        that term under section 3 of the Federal Deposit Insurance Act 
        (12 U.S.C. 1813).
          (2) Custody bank.--The term ``custody bank'' means a 
        depository institution holding company predominantly engaged in 
        custody, safekeeping, and asset servicing activities, including 
        any insured depository institution subsidiary of such a holding 
        company.
          (3) Depository institution holding company.--The term 
        ``depository institution holding company'' has the meaning 
        given that term under section 3 of the Federal Deposit 
        Insurance Act (12 U.S.C. 1813).
          (4) Insured depository institution.--The term ``insured 
        depository institution'' has the meaning given that term under 
        section 3 of the Federal Deposit Insurance Act (12 U.S.C. 
        1813).
          (5) Supplementary leverage ratio.--The term ``supplementary 
        leverage ratio'' means the supplementary leverage ratio, 
        including applicable buffers, surcharges, and well-capitalized 
        requirements relating to such supplementary leverage ratio, as 
        defined by regulation of the appropriate Federal banking agency 
        in title 12, Code of Federal Regulations, as in effect on 
        October 1, 2017.

    Amend the title so as to read:
    A bill to ensure that certain funds shall not be taken into 
account when calculating any supplementary leverage ratio for 
custody banks, and for other purposes.

                          PURPOSE AND SUMMARY

    Introduced by Congressman Keith Rothfus on April 25, 2017, 
H.R. 2121, the ``Pension, Endowment, and Mutual Fund Access to 
Banking Act'', would permit a custodial bank to exclude from 
the calculations of its applicable supplementary leverage 
ratio, subject to limitations, the funds deposited with a 
``high-quality'' central bank. Within sixty days of enactment 
of H.R. 2121, the federal banking regulators must update 
``applicable regulations'' to account for the changes made by 
the legislation.

                  BACKGROUND AND NEED FOR LEGISLATION

    In response to the 2008 financial crisis, the Basel 
Committee on Banking Supervision (Basel Committee) agreed to 
modify internationally negotiated bank regulatory standards 
known as the Basel Accords, to increase bank capital 
requirements.
    Basel III increased the minimum leverage ratio from 3 
percent to 4 percent for certain banks, including those with a 
strong supervisory rating. The leverage ratio is calculated 
based on the value of a bank's assets without the use of risk-
weighting. On July 9, 2013, the federal banking regulators, 
including the Federal Reserve, the Federal Deposit Insurance 
Corporation, and the Office of the Comptroller of the Currency, 
issued a final rule to implement many of the Basel III 
recommendations.
    In addition to the simple leverage ratio, Basel III 
established a ``supplementary leverage ratio'' (SLR) that 
requires certain larger banking organizations to maintain a 3 
percent ratio of tier 1 capital to total leverage exposure. The 
SLR includes leverage exposures that are both on and off asset 
the bank's balance sheet. All banks with at least $250 billion 
in total assets and $10 billion in foreign assets must meet a 3 
percent SLR. In addition, banks with more than $700 billion in 
assets or $10 trillion in assets under custody must maintain a 
5 percent SLR to avoid restrictions on capital distributions 
and discretionary bonuses, and 6 percent for depository 
subsidiaries to be considered well capitalized.
    In April 2014, federal banking regulators proposed and 
adopted an ``enhanced supplementary leverage ratio'' (eSLR) for 
the U.S. global systemically important banking organizations, 
or ``U.S. G-SIBs,'' of 5 percent at the bank holding company 
and 6 percent at each insured depository institution 
subsidiary. Beginning in January 2018, banks subject to the 
rules will be required to meet both the SLR and eSLR.
    In June 2017, the Treasury Department released its first 
report in response to the President's February 3, 2017 
Executive Order entitled ``Core Principles for Regulating the 
United States Financial System'' to inform the Administration's 
perspective to regulate the financial system. The report 
entitled, ``A Financial System That Creates Economic 
Opportunities--Banks and Credit Unions'' provided 
recommendations to improve market liquidity and rationalize 
capital requirements. The report states that ``[s]ignificant 
adjustments should be made to the calculation of the SLR. In 
particular, deductions from the leverage exposure denominator 
should be made, including . . . [c]ash on deposit with central 
banks.''
    H.R. 2121, as amended by an amendment offered by 
Representative Bill Foster, allows a depository institution 
holding company ``predominantly engaged in custody, 
safekeeping, and asset servicing activities'' to exclude from 
the calculations of its applicable supplementary leverage ratio 
funds deposited with a ``high-quality'' central bank. So called 
custodial banks provide asset safekeeping for large 
institutional investors, asset managers, official institutions 
and private wealth clients. Custody services involve the 
holding and servicing of assets for others and custodians 
provide administrative services for their clients such as the 
processing of income and interest payments, proxy voting, 
transfer agency services, securities lending and the redemption 
of securities, among other activities.
    Banks that have a predominant amount of businesses derived 
from custodial services are different from banks that engage in 
a wide variety of banking activities, as their revenues are 
primarily derived from fees for custodial services as opposed 
to net interest revenue generated from lending and other 
interest-earning activities. In addition, custodial banks that 
meet the definition of ``predominantly engaged in custody, 
safekeeping, and asset servicing activities'' as required under 
H.R. 2121 often deposit funds with high-quality central banks 
or invest funds in other very low-risk assets. Based on the 
publicly available data, and discussions with market 
participants and with banks that provide custodial services, 
the Committee believes that only the three traditional 
custodial banks meet H.R. 2121's definition.
    The difference in balance sheets associated custody banks 
predominantly engaged in custodial services and those of 
commercial banks was highlighted in a July 2016 white paper 
published by the Clearing House, and entitled ``The Custody 
Services of Banks'':
          According to a report published by Autonomous, on an 
        asset-weighted average basis, net interest income 
        accounted for just under 60% of U.S. banks' revenues in 
        2014, with the percentage ranging from over 75% for 
        smaller regional banks (with total assets between $1 
        billion and $50 billion) and approximately 60% for 
        large regional banks (with total assets between $50 
        billion and $500 billion) to approximately 50% for 
        large banks (with total assets above $500 billion) . . 
        .
          . . . In the four-year period from 2012 through 2015, 
        the percentage of total revenues accounted for by 
        revenues from custody services ranged from 64.1% to 
        69.2% for BNY Mellon, 51.4% to 53.8% for Northern 
        Trust, and 87.7% to 88.4% for State Street. The 
        majority of the revenues from custody services consist 
        of fees rather than net interest income, although, as 
        described below, custodians do earn net interest 
        income, which contributes to their overall 
        profitability.\1\
---------------------------------------------------------------------------
    \1\``The Custody Services of Banks,'' The Clearing House (July 
2016), available at https://www.theclearinghouse.org/-/media/tch/
documents/research/articles/2016/07/
20160728_tch_white_paper_the_custody_services_of_banks.pdf?la=en.
---------------------------------------------------------------------------
    In a letter of support for H.R. 2121 dated October 10, 
2017, the Financial Services Roundtable wrote:
          Pension funds, mutual funds, and endowments depend on 
        custody banks for the day-to-day services that allow 
        individuals to build wealth and invest. The services 
        include recordkeeping to ensure that retirement 
        accounts, pension funds, and other assets are safe and 
        secure, and processing customers' asset sales and 
        purchases. The Supplementary Leverage Ratio (SLR) 
        required by banking regulators has a disproportionate 
        effect on custody banks because of their higher 
        proportion of safe assets, particularly cash at central 
        banks. H.R. 2121 will modify the SLR requirements for 
        these institutions and preserve their ability to place 
        customer cash on deposit at central banks.
    In a letter of support for H.R. 2121 dated October 10, 
2017, the Securities Industry and Financial Markets Association 
wrote:
        This technical correction is an important step to 
        improve the SLR to ensure that custody banks have 
        enough balance sheet capacity to provide clients with a 
        safe haven during stressed market conditions. 
        Accordingly, this legislative fix would improve custody 
        banks' abilities to service clients, reduce market 
        stress, and enhance financial stability.

                                HEARINGS

    The Committee on Financial Services held hearings 
discussing matters relating to H.R. 2121 on February 15, 2017 
and July 12, 2017.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
October 12, 2017 and ordered H.R. 2121 to be reported favorably 
to the House as amended by a recorded vote of 60 yeas to 0 nays 
(Record vote no. FC-76), a quorum being present. Before the 
motion to report was offered, the Committee adopted an 
amendment in the nature of a substitute offered by Mr. Rothfus, 
and the Committee adopted by voice vote an amendment to the 
amendment in the nature of a substitute by Mr. Foster.

                            COMMITTEE VOTES

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House as amended. The motion 
was agreed to by a recorded vote of 60 yeas to 0 nays (Record 
vote no. FC-76), a quorum being present.


                      COMMITTEE OVERSIGHT FINDINGS

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.

                    PERFORMANCE GOALS AND OBJECTIVES

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 2121 
will remove burdensome, costly and unnecessary regulations from 
custodial banks that were not originally intended for them by 
providing for the Federal Reserve Board, the Federal Deposit 
Insurance Corporation (FDIC), and the Office of the Comptroller 
of the Currency (OCC) to specify that central bank placements 
are excluded when calculating the applicable supplementary 
leverage ratio for a custodial bank.

   NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                 CONGRESSIONAL BUDGET OFFICE ESTIMATES

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, February 23, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2121, the Pension, 
Endowment, and Mutual Fund Access to Banking Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Kathleen 
Gramp and Sarah Puro.
            Sincerely,
                                                Keith Hall,
                                                          Director.
    Enclosure.

H.R. 2121--Pension, Endowment, and Mutual Fund Access to Banking Act

    Summary: H.R. 2121 would adjust the calculation of a 
financial ratio called the supplementary leverage ratio (SLR), 
for certain banks that engage predominately in banking 
activities that the bill defines as custody, safekeeping, and 
asset serving.\1\ The bill would permit certain large financial 
institutions to omit cash balances held at the Federal Reserve 
and other central banks from their SLR calculations. Currently, 
all assets must be included in the denominator of that ratio.
---------------------------------------------------------------------------
    \1\The SLR is a capital-to-assets ratio that accounts for 
derivatives and other commitments that are not typically included in a 
bank's leverage ratio calculation.
---------------------------------------------------------------------------
    CBO estimates that enacting H.R. 2121 would increase 
deficits by $45 million over the 2018-2027 period. That amount 
includes a net increase in direct spending of $50 million and 
an increase in revenues of $5 million. Most of those costs 
would be recovered from financial institutions in years after 
2027. Because enacting the bill would affect direct spending 
and revenues, pay-as-you-go procedures apply.
    CBO estimates that enacting H.R. 2121 would not increase 
net direct spending or on-budget deficits by more than $2.5 
billion in any of the four consecutive 10-year periods 
beginning in 2028.
    H.R. 2121 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA).
    If the Federal Deposit Insurance Corporation (FDIC) 
increases fees to offset some of the costs of implementing the 
bill, H.R. 2121 would increase the cost of an existing mandate 
on the depository and large financial institutions that are 
required to pay those fees. Using information from the affected 
agencies, CBO estimates that the incremental cost of the 
mandate would fall well below the annual threshold for private-
sector mandates established in UMRA ($156 million in 2017, 
adjusted annually for inflation).
    Estimated cost to the Federal Government: The estimated 
budgetary effect of H.R. 2121 is shown in the following table. 
The costs of this legislation fall within budget function 370 
(advancement of commerce).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                  By fiscal year, in millions of dollars--
                                                   -----------------------------------------------------------------------------------------------------
                                                     2018    2019    2020    2021    2022    2023    2024    2025    2026    2027   2018-2022  2018-2027
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              INCREASES IN DIRECT SPENDING
 
Estimated Budget Authority........................       0       3       5       7       7       6       6       5       5       6        22         50
Estimated Outlays.................................       0       3       5       7       7       6       6       5       5       6        22         50
 
                                                                  INCREASES IN REVENUES
 
Estimated Revenues................................       0       0       0       0       0       1       1       1       1       1         0          5
 
                                       NET INCREASE IN THE DEFICIT FROM INCREASES IN DIRECT SPENDING AND REVENUES
 
Effect on the Deficit.............................       0       3       5       7       7       5       5       4       4       5        22         45
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Basis of estimate: The budgetary effects of H.R. 2121 stem 
from a small increase in the chance that the FDIC would incur 
additional costs to resolve failed financial institutions, 
because of the change in the SLR, which could reduce the amount 
of capital that a few banks hold. For this estimate, CBO 
assumes that the bill will be enacted late in 2018.
    CBO's estimate for H.R. 2121 is based on the analysis that 
underlies projections for deposit insurance in its June 2017 
baseline. Those projections incorporate the small probability 
of a financial crisis in any given year within the projection 
period and the more likely scenario of an average number of 
bank and credit union failures in any given year. As a result, 
the estimated cost of this legislation represents a weighted 
probability of outcomes--including some cases for which the 
probability is very low but for which the costs to the Deposit 
Insurance Fund (DIF) or the Orderly Liquidation Fund (OLF) are 
much larger. Both of those funds are administered by the 
FDIC.\2\
---------------------------------------------------------------------------
    \2\The DIF resolves the assets of failed insured depository 
institutions and insures certain deposits up to $250,000 per person. It 
is funded by premiums paid by insured institutions. The OLF would 
resolve failures of certain large, systemically important financial 
institutions--including banks and nonbanks. In the event of such a 
failure, costs to the OLF would be recouped by assessments on other 
large financial institutions (which are recorded as revenues in the 
budget).
---------------------------------------------------------------------------
    CBO estimates that the bill would effectively allow up to 
five large financial institutions to omit their cash balances 
held at the Federal Reserve and other central banks when 
calculating the SLR. The bill's provisions could reduce the 
capital that those institutions must hold relative to their 
assets. The net effect of implementing the bill would vary 
among eligible institutions because the SLR is only one measure 
used by federal regulators to determine how much capital a bank 
must hold. The net budgetary effects of implementing the bill 
also would be different for the DIF and the OLF.
    The number of financial institutions and the amount of 
assets that could be affected depend on how the federal 
financial regulators implement the bill. Specifically, H.R. 
2121 stipulates that the change in the calculation of the SLR 
would apply to banks that are ``predominately'' in the business 
of custody services.\3\ CBO expects that the three traditional 
custody banks in the United States--Bank of New York, State 
Street, and Northern Trust--would clearly qualify for the SLR 
adjustments authorized by the bill. Their combined assets were 
about $720 billion in 2017. CBO estimates that regulators also 
may determine that other institutions would be eligible for the 
SLR adjustment if the value of their custodial activities is 
similar to that of the three traditional custody banks. For 
this estimate, CBO assumes that there is a 50 percent chance 
that regulators would allow two other financial institutions--
JP Morgan and Citibank, with combined assets of $4.4 trillion--
to adjust their SLRs under the terms in the bill.\4\
---------------------------------------------------------------------------
    \3\Custody services include holding and servicing assets on behalf 
of other clients. Custody services often are provided to large 
institutional investors and private wealth clients and include the 
settlement, holding, and reporting of customers' marketable securities 
and cash.
    \4\See The Clearing House, The Custody Services of Banks (July 
2016), page 16, http://tinyurl.com/yat2wep7.
---------------------------------------------------------------------------
    Changes in the amount of capital that a bank holds can 
affect its probability of failure, which in turn may affect 
costs incurred by the DIF and the OLF.\5\ Costs to the DIF 
would stem primarily from decreases in capital at JP Morgan and 
Citibank because the three traditional custody banks hold few 
insured deposits. In contrast, costs to the OLF would stem 
primarily from decreases in capital at the three traditional 
custody banks.
---------------------------------------------------------------------------
    \5\The academic literature suggests that a 1 percent decrease in 
the capital-to-assets ratio for a bank can increase the probability of 
failure by between 5 percent and 60 percent. CBO used a midpoint of 
that range for this estimate.
---------------------------------------------------------------------------
    Based on publicly available information about the 
components of bank balance sheets and on the loss and failure 
rate estimates that underlie CBO's June 2017 baseline 
projections, CBO estimates that over the 2018-2027 period, 
implementing the bill would increase the deficit by $45 
million, or by roughly 0.05 percent of the June baseline 
projection for FDIC programs. That amount includes an increase 
in direct spending of $50 million and an increase of revenues 
of $5 million. CBO estimates that most of the costs would be 
offset after 2027 by an increase in fees paid by financial 
institutions.
    Pay-as-You-Go considerations: The Statutory Pay-As-You-Go 
Act of 2010 establishes budget-reporting and enforcement 
procedures for legislation affecting direct spending or 
revenues. The net changes in outlays and revenues that are 
subject to those pay-as-you-go procedures are shown in the 
following table.

  CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 2121, THE PENSION, ENDOWMENT, AND MUTUAL FUND ACCESS TO BANKING ACT, AS ORDERED REPORTED BY THE HOUSE
                                                   COMMITTEE ON FINANCIAL SERVICES ON OCTOBER 12, 2017
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                         By fiscal year, in millions of dollars--
                                                                ----------------------------------------------------------------------------------------
                                                                  2018   2019   2020   2021   2022   2023   2024   2025   2026   2027   2022   2018-2027
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               NET INCREASE IN THE DEFICIT
 
Statutory Pay-As-You-Go Impact.................................      0      3      5      7      7      5      5      4      4      5      22        45
Memorandum:
  Changes in Outlays...........................................      0      3      5      7      7      6      6      5      5      6      22        50
  Changes in Revenues..........................................      0      0      0      0      0      1      1      1      1      1       0         5
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Increase in long-term direct spending and deficits: CBO 
estimates that enacting the legislation would not increase net 
direct spending or on-budget deficits by more than $2.5 billion 
in any of the four consecutive 10-year periods beginning in 
2028.
    Mandates: H.R. 2121 contains no intergovernmental mandates 
as defined in UMRA.
    If the FDIC increases premiums or fees to offset the costs 
of implementing the bill, H.R. 2121 would increase the cost of 
an existing mandate on the depository and large financial 
institutions required to pay those fees. Using information from 
the agencies, CBO estimates that the incremental cost of the 
mandate would be below the annual threshold for private-sector 
mandates established in UMRA ($156 million in 2017, adjusted 
annually for inflation).
    Estimate prepared by: Federal Costs: Kathleen Gramp and 
Sarah Puro; Mandates: Rachel Austin.
    Estimate approved by: H. Samuel Papenfuss, Deputy Assistant 
Director for Budget Analysis.

                       FEDERAL MANDATES STATEMENT

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995.
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                      ADVISORY COMMITTEE STATEMENT

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  APPLICABILITY TO LEGISLATIVE BRANCH

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         EARMARK IDENTIFICATION

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                    DUPLICATION OF FEDERAL PROGRAMS

    In compliance with clause 3(c)(5) of rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                   DISCLOSURE OF DIRECTED RULEMAKING

    Pursuant to section 3(i) of H. Res. 5, (115th Congress), 
the following statement is made concerning directed 
rulemakings: The Committee estimates that the bill requires no 
directed rulemakings within the meaning of such section.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

    This Section cites H.R. 2121 as the ``Pension, Endowment, 
and Mutual Fund Access to Banking Act.''

Section 2. Treatment of funds deposited with a central bank in 
        calculating the applicable supplementary leverage ratio

    This Section deems cash on deposit with a high-quality 
central bank held by a custody bank excluded from the 
denominator of the supplementary leverage ratio. Such funds are 
limited to (a) the total value of deposits of the custody bank 
linked to fiduciary or custodial and safekeeping accounts; and 
(b) an amount that is greater than a percentage of the total 
leverage exposure of the custodial bank, based on 
considerations such as the potential impact on the safety and 
soundness of the custodial bank and the ability of the 
custodial bank to continue to accept cash deposits from 
customers that are linked to fiduciary or custodial and 
safekeeping accounts.
    A high-quality central bank includes the U.S Federal 
Reserve, the European Central Bank, or a central bank of a 
member country of the Organization for Economic Co-operation 
and Development (OECD) assigned a 0% risk weight under the U.S. 
Basel III standardized approach capital rules, whose sovereign 
debt is not in default, or has not been in default during the 
previous five years.

         CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    H.R. 2121 does not repeal or amend any section of a 
statute. Therefore, the Office of Legislative Counsel did not 
prepare the report contemplated by Clause 3(e)(1)(B) of rule 
XIII of the House of Representatives.

                            ADDITIONAL VIEWS

    One of the cornerstones of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank) was a mandate 
that the largest, most complex financial institutions be 
subject to enhanced prudential standards, including more 
stringent capital requirements and leverage limits, to better 
ensure safety and soundness and promote financial stability. 
The 2008 financial crisis exposed many problems with our 
financial regulatory framework, including an undercapitalized 
banking system. With the enactment of Dodd-Frank and related 
post-crisis regulatory developments, the largest U.S. banks 
have subsequently increased their loss-absorbing common equity 
capital by more than $700 billion, more than doubling their 
common equity capital ratios from approximately 5 percent to 
more than 12 percent.\1\ As a result of these reforms, the 
financial system is much safer, which in turn has promoted 
stable economic growth.
---------------------------------------------------------------------------
    \1\Federal Reserve Board Vice Chairman of Supervision Randal 
Quarles, Testimony before the House Committee on Financial Services 
hearing entitled ``Semi-Annual Testimony on the Federal Reserve's 
Supervision and Regulation of the Financial System,'' (Apr 17, 2018), 
https://financialservices.house.gov/uploadedfiles/hhrg-115-ba00-wstate-
rquarles-20180417.pdf.
---------------------------------------------------------------------------
    One example of such a reform is the implementation by U.S. 
banking regulators--specifically the Board of Governors of the 
Federal Reserve System (Federal Reserve Board), the Office of 
the Comptroller of the Currency (OCC), and the Federal Deposit 
Insurance Corporation (FDIC)--of the supplementary leverage 
ratio (SLR) rule to ensure the largest banks don't become 
overleveraged and fail in an economic downturn. However, 
concerns have been raised with respect to how the SLR, in its 
current form, is being applied to custodial banks. The three 
largest custodial banks manage roughly $65 trillion in assets 
for their customers, including pension funds, endowments and 
other institutional investors,\2\ so they play an important 
role in our financial system. In a future economic downturn or 
financial crisis, institutional clients would likely liquidate 
securities being held by custodial banks for cash, causing a 
large and rapid influx of deposits into central banks. These 
deposits receive a zero percent capital risk weight, but remain 
subject to the SLR. Without some modification, the SLR could 
force custodial banks to limit deposits or raise capital in the 
midst of a crisis, making a bad situation worse.
---------------------------------------------------------------------------
    \2\See the U.S. Securities and Exchange Commission's (SEC's) 2016 
Form 10-K for State Street Corp., available at http://
investors.statestreet.com/Cache/38179223.PDF?O=PDF&T=&Y=&D= 
&FID=38179223&iid=100447; the SEC's 2016 Form 10-K for The Bank of New 
York Mellon Corp., available at https://www.bnymellon.com/_global-
assets/pdf/investor-relations/form-10-k-2016.pdf; the SEC's Form 10-K 
for Northern Trust Corp., available at Northern Trust, ``2016 Annual 
Report to Shareholders'' (2016), available at https://
www.northerntrust.com/documents/annual-reports/northern-trust-annual-
report-2016.pdf?bc=25199835.
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    In testimony before Congress, former Federal Reserve Chair 
Janet Yellen acknowledged the need to revisit the calibration 
of the SLR.\3\ In August 2016, the Bank of England reversed 
course and excluded money held at the central bank and loans of 
up to three months from the calculation of a bank's leverage 
ratio, and called on their foreign counterparts to adjust the 
Basel III standards at the international level.\4\
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    \3\House Committee on Financial Services hearing entitled 
``Monetary Policy and the State of the Economy'' Wednesday, (July 12, 
2017), https://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=402098. Also see Alistair Gray and Sam 
Fleming, ``Yellen signals Fed may relax crisis-era bank safety rule,'' 
Financial Times, https://www.ft.com/content/elf5f0f4-6800-11e7-9a66-
93fb352balfe, and Former Governor Dan Tarullo, ``Departing Thoughts,'' 
remarks at the Woodrow Wilson School, Princeton University, (April 4, 
2017), https://www.federalreserve.gov/newsevents/speech/
tarullo20170404a.htm.
    \4\Huw Jones, ``Bank of England eases banks' capital leverage rule 
to help support economy,'' Reuters (Aug. 4, 2016), http://
www.reuters.com/article/britain-boe-banks/bank-of-england-eases-banks-
capital-leverage-rule-to-help-support-economy-idUSL8N1AL40S.
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    In the meantime, H.R. 2121, the Pension, Endowment, and 
Mutual Fund Access to Banking Act, seeks to address issues with 
the SLR's application to custodial banks. The bill would 
require federal banking agencies to specify that funds of a 
custodial bank that are deposited with a central bank generally 
not be taken into account when calculating the applicable SLR 
for a custodial bank. The exemption is limited to banks that 
are predominantly engaged in custodial banking and the amount 
of funds deposited linked to the bank's custodial and 
safekeeping accounts. And because of an amendment offered by 
Rep. Bill Foster during the Committee's consideration of H.R. 
2121 that was unanimously adopted, the exemption is limited to 
certain central banks, including the Federal Reserve and the 
European Central Bank, and can be further limited by regulators 
based on safety and soundness considerations.
    A similar provision was included as section 402 in S. 2155, 
the Economic Growth, Regulatory Relief, and Consumer Protection 
Act, which was passed by the Senate in March 2018, however the 
Senate provision lacks similar flexibility contained in H.R. 
2121 with respect to the potential impact on the safety and 
soundness of the custodial bank.
    It is worth noting several developments that occurred after 
the Committee's consideration of H.R. 2121 in October 2017 that 
the House should consider prior to further action on the 
legislation.
Scope of H.R. 2121 and CBO estimate
    The Congressional Budget Office (CBO), in reviewing H.R. 
2121 for budgetary scoring purposes following the Committee's 
consideration, wrote that they expect, ``that the three 
traditional custody banks in the United States--Bank of New 
York, State Street, and Northern Trust--would clearly qualify 
for the SLR adjustments authorized by the bill. Their combined 
assets were about $720 billion in 2017. CBO estimates that 
regulators also may determine that other institutions would be 
eligible for the SLR adjustment if the value of their custodial 
activities is similar to that of the three traditional custody 
banks. For this estimate, CBO assumes that there is a 50 
percent chance that regulators would allow two other financial 
institutions--JP Morgan and Citibank, with combined assets of 
$4.4 trillion--to adjust their SLRs under the terms in the 
bill.''\5\ This is despite the fact that H.R. 2121 includes 
clear language that limits the scope to ``a depository 
institution holding company predominantly engaged in custody, 
safekeeping, and asset servicing activities, including any 
insured depository institution subsidiary of such a holding 
company.''\6\ (emphasis added)
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    \5\https://www.cbo.gov/system/files/115th-congress-2017-2018/
costestimate/hr2121.pdf.
    \6\See subsection (d)(2).
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    Despite CBO's estimation, there should be no mistake or 
misinterpretation, it never was the intent, nor does the 
legislation provide for expanding its application to large 
universal banks like JPMorgan and Citibank that engage in a 
wider variety of financial activities beyond custodial banking 
compared to banks engaged predominantly in custodial banking 
activities.
Basel Committee's December 2017 agreement
    Furthermore, the Federal Reserve and other U.S. bank 
regulators reached an agreement with their international 
counterparts on the Basel Committee on Banking Supervision 
(Basel Committee)\7\ in December 2017 to finalize the Basel III 
capital framework.\8\ The agreement would allow individual 
country's to provide more targeted flexibility for custodial 
assets with more safeguards. In a summary document, the Basel 
Committee wrote: ``The Committee has also agreed that 
jurisdictions may exercise national discretion in periods of 
exceptional macroeconomic circumstances to exempt central bank 
reserves from the leverage ratio exposure measure on a 
temporary basis. Jurisdictions that exercise this discretion 
would be required to recalibrate the minimum leverage ratio 
requirement commensurately to offset the impact of excluding 
central bank reserves, and require their banks to disclose the 
impact of this exemption on their leverage ratios.''\9\
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    \7\The Federal Reserve Board, the Federal Reserve Bank of New York, 
OCC and FDIC are U.S. members of the Basel Committee. See https://
www.bis.org/bcbs/membership.htm. It is worth noting at the time this 
December 2017 agreement was reached, President Trump's appointees for 
the Federal Reserve's Vice Chair of Supervision and the Comptroller of 
the Currency were confirmed by the Senate and in place to participate 
in the Basel Committee's deliberations.
    \8\This has been referred by some as the Basel III ``end game.'' 
For more information, see https://www.bis.org/bcbs/publ/d424.htm and 
https.//www.bbvaresearch.com/wp-content/uploads/2017/12/Watch-Basel-
IV.pdf.
    \9\https://www.bis.org/bcbs/publ/d424_hlsummary.pdf at 10.
---------------------------------------------------------------------------
    Even without H.R. 2121, the U.S. banking regulators have 
the authority to adjust SLR on their own to implement such a 
change, and arguably the Basel Committee's recommendation is a 
more narrowly tailored option. To that end, some experts have 
made recommendations on streamlining various capital and 
leverage requirements.\10\ Other experts have raised concerns 
about any exemption from leverage rules,\11\ however, the 
Center for American Progress has recommended a similarly 
tailored solution that the Basel Committee recommended compared 
to a broader statutory change.\12\
---------------------------------------------------------------------------
    \10\For example, see Robin Greenwood, Samuel G. Hanson, Jeremy C. 
Stein, and Adi Sunderam, ``Strengthening and streamlining bank capital 
regulation,'' https://www.brookings. edu/bpea-articles/strengthening-
and-streamlining-bank-capital-regulation/.
    \11\For example, see letters commenting on Section 402 of S. 2215, 
available at: https://www.banking.senate.gov/newsroom/mmority/what-
wall-street-reform-leaders-are-saying-about-s2155-the-dodd-frank-roll-
back-bill.
    \12\CAP, ``Resisting Financial Deregulation,'' Dec. 4, 2017 at 14 
and 15.
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New regulatory proposals to adjust capital leverage rules
    In addition, the Federal Reserve Board has been 
developing\13\ and recently released two proposals that would 
make major changes to capital, stress testing and leverage 
requirements for the largest U.S. banks. On April 10, 2018, the 
Federal Reserve Board announced the first proposal, which would 
simplify its capital rules for large banks and introduce a 
``stress capital buffer,'' or SCB, which would in part 
integrate the forward-looking stress test results with the 
Fed's non-stress capital requirements.\14\ The second and more 
pertinent proposal issued by the Federal Reserve Board, along 
with the OCC, is a plan to substantially revise the current 
enhanced supplementary leverage ratio (eSLR) that applies to 
global systemically important banks (G-SIBs), including two 
custodial banks.\15\
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    \13\https://www.bloomberg.com/news/articles/2018-01-19/fed-said-to-
be-finishing-proposal-to-ease-up-on-bank-leverage and https://
www.bloomberg.com/news/articles/2018-02-01/deposit-shunning-banks-get-
big-break-as-u-s-eases-leverage-rule.
    \14\https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20180410a.htm and https://www.federalreserve. gov/newsevents/
pressreleases/files/bcreg20180410a1.pdf.
    \15\https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20180411a.htm.
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    Currently, G-SIBs must maintain a supplementary leverage 
ratio of more than 5 percent to avoid limitations on capital 
distributions and certain discretionary bonus payments. The 
insured depository institution subsidiaries of the G-SIBs must 
maintain a supplementary leverage ratio of 6 percent to be 
considered ``well capitalized'' under the agencies' prompt 
corrective action framework. The proposal modifies these 
minimum leverage ratios with a new calculation: 3 percent plus 
half of each G-SIB's risk-based capital surcharge for both the 
holding company and insured depository institution 
subsidiaries. Arguably, this proposal implements the recent 
Basel III end game agreement. According to the Fed, ``Taking 
into account supervisory stress testing and existing capital 
requirements, agency staff estimate that the proposed changes 
would reduce the required amount of tier 1 capital for the 
holding companies of these firms by approximately $400 million, 
or approximately 0.04 percent in aggregate tier 1 capital.''
    That said, this proposal received a dissenting vote from 
Fed Governor Lael Brainard, the first such dissent since 2011 
when former Governor Duke dissented from a proposal on 
interchange fees.\16\ In a recent speech, Governor Brainard 
said, ``At a time when valuations seem stretched and cyclical 
pressures are building, I would be reluctant to see our large 
banking institutions releasing the capital and liquidity 
buffers that they have built so effectively over the past few 
years, especially since credit growth and profitability in the 
U.S. banking system are robust.''\17\
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    \16\https://www.politicopro.com/financial-services/article/2018/04/
fed-occ-release-plan-to-ease-backup-capital-rule-for-biggest-banks-
477397.
    \17\https://www.federalreserve.gov/newsevents/speech/
brainard20180403a.htm.
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    The FDIC announced opposition to the Fed plan as well and 
disputed the potential impact on capital requirements for the 
largest banks. After the proposal was released, FDIC Chairman 
Martin Gruenberg said, ``Strengthening leverage capital 
requirements for the largest, most systemically important banks 
in the United States was among the most important post crisis 
reforms . . . . the amount of tier 1 capital required under the 
proposed eSLR standard across the lead IDI subsidiaries would 
be approximately $121 billion less than what is required under 
the current eSLR standard to be considered well-
capitalized''\18\ (emphasis added). In a speech given before 
the eSLR proposal was made public, FDIC Vice Chair Hoenig 
raised similar concerns.\19\
---------------------------------------------------------------------------
    \18\https://www.americanbanker.com/news/fed-occ-back-proposal-to-
ease-big-bank-capital-measure.
    \19\Hoenig said, ``[I]t concerns me that the U.S. regulatory 
agencies have joined the recent Basel Committee agreement that, 
according to some estimates, could remove as much as $145 billion of 
capital from the eight largest banking firms. This is 
counterproductive. As I noted earlier, the U.S. banking system is 
stronger than that of any other region. Even with tangible equity at 
only 6.62 percent of total assets plus the fair value of derivatives, 
the market has come to rely most heavily on U.S. banks over their less 
well-capitalized foreign peers. Also, U.S. bank stocks are trading at 
premiums with an average price-to-book ratio of 1.4. In contrast, 
foreign banks trade at an average ratio well below 1, a reflection of 
their lower capital and poorly priced risks. Should the U.S. banking 
agencies embrace the Basel standard, the reduction in private capital 
would necessarily be underwritten by the FDIC, the Federal Reserve, and 
then the taxpayer. As an example, one bank that received more than $100 
billion dollars of capital and liquidity support in the last financial 
crisis would be free to reduce its capital by 30 percent under the new 
Basel accord. The United States should not engage in this race to the 
bottom.'' Available at: https://www.fdic.gov/news/news/speeches/
spmar2818.html.
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    In response to a request from Committee staff for more 
information, the FDIC estimates the eSLR proposal would lower 
capital requirements for the primary federally-insured bank 
subsidiary of each G-SIB as follows:
           JPMorgan Chase & Co.: $34.597 billion 
        (20.83% reduction in tier 1 capital)
           Citigroup: $26.978 billion (23.3% reduction)
           Bank of America: $22.838 billion (18.5% 
        reduction)
           Wells Fargo: $20.406 billion (16.9% 
        reduction)
           Bank of New York Mellon: $5.911 billion 
        (33.65% reduction)
           State Street: $5.346 billion (37.5% 
        reduction)
           Morgan Stanley: $2.507 billion (25% 
        reduction)
           Goldman Sachs: $1.93 billion (9.49% 
        reduction)
    These developments come despite the fact that Fed Chair 
Powell recently said that the Fed's requirements for the 
largest banks are ``very high and they're going to remain very 
high,'' he said following a recent speech at the Economic Club 
of Chicago.\20\ Chair Powell continued, ``As you look around 
the world, U.S. banks are competing very, very successfully. 
They're very profitable. They're earning good returns on 
capital. Their stock prices are doing well. So I'm looking for 
the case, for some kind of evidence that--and I'm open to 
this--some kind of evidence that regulation is holding them 
back, and I'm not really seeing that case as made at this 
point.''\21\
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    \20\https://www.federalreserve.gov/newsevents/speech/
powell20180406a.htm.
    \21\Politico Pro, ``Powell doesn't see need to loosen rules on 
biggest banks,'' April 6, 2018. Furthermore, while lowering the SLR 
would reduce the likelihood of it serving as a binding constraint, 
increasing risk-based capital rules would have the same effect. The 
Federal Reserve Board's own research has indicated current capital 
rules are on the lower end of requirements that best balances benefits 
associated with mitigating systemic risk with a bank's funding costs 
(see https://www.federalreserve.gov/econres/feds/files/2017034pap.pdf). 
According to a 2017 farewell speech by former Fed Governor Tarullo, ``A 
recent study by three Federal Reserve Board researchers concludes that 
the tier 1 capital requirement that best achieves this balance is 
somewhere in the range of 13 percent to 26 percent, depending on 
reasonable choices made on some key assumptions. By this assessment, 
current requirements for the largest U.S. firms are toward the lower 
end of this range, even when one takes account of the de facto capital 
buffers imposed on most firms in connection with the stress test.'' 
(See https://www.federalreserve.gov/newsevents/speech/
tarullo20170404a.htm). The Federal Reserve Bank of Minnesota recently 
released an even more aggressive plan to increase capital and leverage 
requirements, with Step 1 of their proposal requiring the largest banks 
to issue common equity equal to 23.5 percent of risk-weighted assets 
and a corresponding leverage ratio of 15 percent, with further 
increases in capital required to eliminate a bank's systemic 
importance. Their proposal also summarizes other relevant research on 
appropriate capital and leverage requirements put forward by the Bank 
for International Settlements, Financial Stability Board, Basel 
Committee, Macroeconomic Assessment Group and the International 
Monetary Fund (IMF) (see https://www.minneapolisfed.org/publications/
special-studies/endingtbtf).
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Conclusion
    It is our view that H.R. 2121 is intended to deal with an 
important, but narrow issue with respect to current leverage 
rules and how they may limit custodial banks' ability to 
respond to a sudden surge of deposits from pension funds and 
other institutional investors in the event of a crisis. While 
improvements to leverage and other prudential rules should be 
considered, it is worth stressing that Dodd-Frank and the 
enhanced prudential rules generally have strengthened the 
resilience of the financial system and better protected 
taxpayers and the U.S. economy from another costly crisis.
    As regulators have issued new proposals to revise leverage 
limits and other rules, it is clear U.S. banking regulators 
possess the authority to make modifications to address these 
issues without further legislation. However, these proposals go 
well beyond addressing this particular issue regarding 
custodial assets, and warrant further scrutiny by Congress.
    It is critically important that an attempt to solve a 
narrow problem does not result in a much more sweeping and 
unintentional reduction of critical standards that would 
undermine the safety and soundness of our largest financial 
institutions. Such a result would be contrary to the intent of 
H.R. 2121.

                                   Maxine Waters.
                                   Bill Foster.

                                  [all]