Bank Leverage Limits: Proposed Enhanced Supplementary Leverage Ratio Would Substantially Increase Leverage Capital Requirements for Certain Systemically Important Bank Holding Companies and Their Insured Depository Institution Subsidiaries

Sullivan & Cromwell LLP - July 11, 2013

On July 9, 2013, the Federal Deposit Insurance Corporation (the “FDIC”) approved a notice of proposed rulemaking (the “NPR”, and the rules set forth therein, the “Proposed Rules”) to implement an enhanced supplementary leverage ratio (the “Enhanced Leverage Ratio”) that would apply to bank holding companies with total consolidated assets of more than $700 billion or assets under custody of more than $10 trillion, as well as their insured depository institution subsidiaries. Under these applicability criteria, the Enhanced Leverage Ratio requirements would apply to the eight U.S. banking organizations (“Covered BHCs”) that the Financial Stability Board identified in November 2012 as global systemically important banks using the methodology developed by the Basel Committee on Banking Supervision (“BCBS”). The Proposed Rules are a joint proposed rulemaking with the Office of the Comptroller of the Currency (the “OCC”) and the Board of Governors of the Federal Reserve System (the “FRB” and, together with the OCC and FDIC, the “Agencies”). They were issued by the FDIC together with its approval of interim final rules (the “Revised Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations implementing, among other requirements, the Basel III capital framework.

Under the Proposed Rules, Covered BHCs would have to maintain a supplementary Basel III-based leverage ratio (that is, the ratio of Tier 1 capital (numerator) to total leverage “exposure” (denominator), including on-balance sheet assets and many off-balance sheet exposures) of at least 5 percent – the sum of the 3 percent minimum supplementary leverage ratio required under the Revised Basel III Capital Rules and the Enhanced Leverage Ratio’s new proposed buffer of at least 2 percent – in order to avoid restrictions on capital distributions and discretionary bonus payments. In addition, the insured depository institution subsidiaries of Covered BHCs, regardless of size or assets under custody, would be required to satisfy an Enhanced Leverage Ratio requirement of 6 percent to be considered “well capitalized” for purposes of the Agencies’ prompt corrective action regulations.

The Proposed Rules would substantially increase the effective leverage capital requirements for Covered BHCs not only because of their increased percentage requirements but also because the denominator in these Basel III-based calculations includes a broad scope of off-balance sheet items (proposed by the BCBS to be expanded even further), unlike the Agencies’ generally applicable leverage ratio.

The Proposed Rules’ requirements would formally take effect beginning on January 1, 2018. The comment period for the NPR will expire 60 days after the date on which the NPR is published in the Federal Register.