Alert July 16, 2013

Federal Banking Agencies Issue Notice of Proposed Rulemaking Setting Supplementary Leverage Ratio Standards for Largest U.S. Banking Organizations

On July 9, 2013, the FRB, OCC and FDIC (the “Agencies”) jointly issued a notice of proposed rulemaking (the “NPR”) that would increase the supplementary leverage ratio for certain very large, interconnected U.S. banking organizations.  The supplementary leverage ratio is an additional leverage ratio that organizations subject to the advanced approach of the recently issued final capital rules must maintain. The supplementary leverage ratio is based on a broader measure of credit exposures (including off-balance sheet exposures) than the leverage ratio that applies to all banking organizations. Specifically, the NPR would increase the supplementary leverage ratio requirement for any top-tier U.S. bank holding company with more than $700 billion in consolidated total assets (as reported by the bank holding company in its then most recent Consolidated Financial Statement for Bank Holding Companies on Form FR Y-9C) or $10 trillion in assets under custody (as reported by the bank holding company in its then most recent Banking Organization Systemic Risk Report on Form FR Y-15).  Such bank holding companies would be required to maintain a tier 1 capital leverage buffer of at least 2% above the minimum supplementary leverage ratio requirement of 3%, for a total of 5%. Additionally, the insured depository institution subsidiaries of such bank holding companies would be required to maintain a supplementary leverage ratio of at least 6% to be considered “well-capitalized” for prompt corrective action purposes.  Failure to maintain the required supplementary leverage ratio would result in limitations on distributions and discretionary bonus payments. It is important to be aware that applying a higher leverage ratio requirement at the insured depository institution level than at the bank holding company level appears to provide an incentive to covered banking organizations to add leverage outside of their respective insured depository institution subsidiaries.

The Agencies state in the NPR that the supplementary leverage ratio required by the NPR would, if in effect currently, apply only to the eight largest, most systemically significant U.S. bank holding companies: JP Morgan Chase & Co., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group, Inc., Morgan Stanley, The Bank of New York Mellon Corporation, and State Street Corporation. These eight companies are those U.S. organizations identified as global systemically important banking organizations (G-SIBs) in November 2012 by the Financial Stability Board.

In the NPR, the Agencies state that, from a safety-and-soundness perspective, leverage capital requirements and risk-based capital requirements complement each other by offsetting the weaknesses of the other set of capital requirements and that “the two sets of [capital] requirements working together are more effective than either would be in isolation.” The Agencies also concede that the leverage ratio requirements of the NPR would add to the potential complexity of the capital regulations as a whole and would increase the burden on banking organizations of complying with capital requirements. In light of those considerations, the Agencies state they are “proposing [in the NPR] to apply enhanced leverage standards only to those U.S. banking organizations that pose the greatest potential risk to financial stability…”

Comments on the NPR are due 60 days after its publication in the Federal Register, and the Agencies said that the requirements imposed by the NPR would take effect beginning on January 1, 2018.