Bank Capital: Supplementary Leverage Ratio; Federal Banking Agencies Propose Revisions to the Supplementary Leverage Ratio’s Exposure Measure and Approve Final Rules Implementing an Enhanced Supplementary Leverage Ratio for the Largest U.S. Banking Organizations

Sullivan & Cromwell LLP - April 16, 2014

Last week, the Federal Deposit Insurance Corporation (the “FDIC”), the Board of Governors of the Federal Reserve System (the “FRB”) and the Office of the Comptroller of the Currency (the “OCC” and, together with the FDIC and FRB, the “Agencies”) took two important actions relating to the new Basel III-based supplementary leverage ratio (the “SLR”) that the Agencies adopted as part of their July 2013 comprehensive revisions to their regulatory capital rules (the “Revised Capital Rules”) applicable to U.S. banking organizations:

  • First, the Agencies approved a notice of proposed rulemaking (the “NPR”, and the rules set forth therein, the “Proposed Rules”) that would revise the definition and scope of the “total leverage exposure,” which is the denominator of the SLR (and, therefore, also the denominator of the enhanced SLR discussed below).  Under the Revised Capital Rules, the SLR is calculated as the ratio of Tier 1 capital to total leverage exposure and, when it becomes effective on January 1, 2018, will apply only to “advanced approaches banking organizations” – that is, those with $250 billion or more in total consolidated assets or $10 billion or more in foreign exposures.  In June 2013, the Basel Committee on Banking Supervision (the “BCBS”) proposed revisions to the denominator of the Basel III leverage ratio (defined in Basel III as the “exposure measure”) and, in January 2014, adopted final revisions to the Basel III leverage ratio’s exposure measure (the “BCBS 2014 Revisions”).  The Proposed Rules are largely consistent with the BCBS 2014 Revisions and, for most (and perhaps all) affected banking organizations, will increase the total leverage exposure in their SLR calculations and reduce the resulting SLR percentage.
  • Second, the Agencies approved final rules (the “Final Rules”) that effectively would increase the SLR’s normal 3 percent minimum SLR standard to 5 percent for bank holding companies with total consolidated assets of more than $700 billion or assets under custody of more than $10 trillion, and 6 percent for their insured depository institution subsidiaries.  As such, this enhanced SLR (referred to by the Agencies as the “eSLR”) applies to the eight U.S. banking organizations that the Financial Stability Board has identified as global systemically important banks using the methodology developed by the BCBS (the “G-SIB BHCs”).  The Final Rules do not change the 3 percent minimum required SLR for G-SIB BHCs and their insured depository institution subsidiaries but instead apply:
    • a 2 percent buffer for G-SIB BHCs as an add-on to the Revised Capital Rules’ 3 percent minimum required SLR, implemented in a manner similar to the capital conservation buffer with increasing limitations on dividends and other capital distributions and discretionary bonus payments as a G-SIB BHC’s SLR falls below 5 percent and into its buffer zone; and
    • a 6 percent eSLR standard for depository institution subsidiaries of G-SIB BHCs as one of the required standards for “well capitalized” status under the Agencies’ “prompt corrective action” rules.
The Final Rules were adopted largely unchanged from an eSLR proposal published for comment by the Agencies in August 2013 (the “eSLR Proposal”).
Banking organizations and other industry participants, in their comments last year on the eSLR Proposal that became the Final Rules, urged the Agencies not to re-calibrate the SLR for any category of U.S. banking organizations (whether G-SIB BHCs or otherwise) until the BCBS finalized any proposed changes in the Basel III-based leverage ratio (which it did in the BCBS 2014 Revisions) and the Agencies determined whether and how the total exposure measure under the Revised Capital Rules’ Liquidity Coverage Ratio would be modified in connection with the Basel III changes.  Notwithstanding the apparent linkage between the SLR’s calibration and the calculation of the total exposure measure for its denominator, the Agencies determined in the Final Rules to proceed with re-calibration for G-SIB BHCs as embodied in the eSLR without first finalizing changes to the total exposure measure.  The Agencies noted in the NPR that they seek comment on all aspects of the Proposed Rules, including interactions with the Final Rules’ eSLR standard.

The comment period for the Proposed Rules expires on June 13, 2014.  G-SIB BHCs and their subsidiary insured depository institutions will be required to comply with the Final Rules’ eSLR requirement starting on January 1, 2018, the same effective date as the SLR for other affected institutions under the Revised Capital Rules.