Alert April 15, 2014

FRB, FDIC and OCC Issue Final Rule Regarding Leverage Ratios for Largest Top-Tier Bank Holding Companies

On April 8, 2014, the FRB, FDIC and OCC (collectively, the “Agencies”) released a final rule (the “Final Rule”) concerning the leverage ratio standards for large, interconnected U.S. banking organizations.  The Final Rule applies to any U.S. top-tier bank holding company with more than $700 billion in total consolidated assets or more than $10 trillion in assets under custody (a “Covered BHC”).  The Final Rule also applies to any insured depository institution subsidiary of a Covered BHC (a “Covered IDI,” and together with the Covered BHC, a “Covered Organization”).  In July 2013, the Agencies proposed leverage ratios which were consistent with the ratio adopted by the Basel Committee on Banking Supervision (the “Basel Committee”); the Final Rule provides for several ratios that are higher than those adopted by the Basel Committee. 

Under the Final Rule, a Covered IDI must maintain a supplementary leverage ratio of at least 6% (up from 3% proposed by the Basel Committee), and a Covered BHC must maintain a minimum supplementary leverage ratio of 5% (up from 3%).  Under the Final Rule, a Covered BHC that maintains a leverage buffer of Tier 1 capital in an amount greater than 2% of its total leverage exposure is not subject to limitations on distributions or discretionary bonus payments.  The Final Rule is effective January 1, 2018 and currently applies to eight U.S. banking organizations.

The Agencies adopted the Final Rule under the premise that the largest banks have an outsized impact on the banking system, and therefore should be required to hold higher levels of capital, as strong capital is an important safeguard that helps financial institutions navigate periods of financial or economic stress.  The Agencies stated that they believe the Final Rule will strengthen the Covered BHCs, and indirectly, the financial industry, by decreasing the likelihood of capital shortfalls. 

Opponents of the Final Rule have noted that the Final Rule will make U.S.-based Covered Organizations less competitive in the international marketplace.  Further, some note that the Final Rule does little to limit systemic financial risk, as the Final Rule does not address the leverage ratios or capital requirements of participants in the “shadow” banking industry.  Last, a number of critics stated that the increased leverage ratios are arbitrary, and that there are no quantitative studies showing the cumulative impact of such changes.