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From Banking and Finance Law Daily, July 9, 2013

Agencies seek comments on proposed supplementary leverage ratio for U.S.-based G-SIBs

By John M. Pachkowski, J.D.

The Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have proposed a rule to strengthen the leverage ratio standards for the eight largest, most systemically significant U.S. banking organizations. According to news reports, the eight banking organizations that would be subject to the supplementary leverage requirements are JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Wells Fargo & Co., Goldman Sachs Group Inc., Morgan Stanley, Bank of New York Mellon Corp., and State Street Corp. These banking organizations have been deemed to be Global Systemically Important Banks (G-SIBs) by the Financial Stability Board.

In a memorandum prepared by the FDIC’s staff, it was noted that the proposed supplementary leverage requirements “would significantly enhance the existing leverage standards for covered banking organizations, and support the agencies' objectives to mitigate systemic risk and interconnectedness within the financial system as well as misperceptions among market participants that such institutions remain ‘too big to fail’.”

Leverage ratios. Under the proposed rule, bank holding companies (BHCs) with more than $700 billion in consolidated total assets or $10 trillion in assets under custody—“covered BHCs”—would be required to maintain a tier 1 capital leverage buffer of at least 2 percent above the minimum supplementary leverage ratio requirement of 3 percent, for a total of 5 percent.

An insured bank that is a subsidiary of a covered BHC would need to satisfy a 6 percent supplementary leverage ratio threshold to be considered well capitalized for banking agencies’ prompt corrective action regulations.

Consequences of noncompliance. Failure to exceed the 5 percent ratio would subject covered BHCs to restrictions on discretionary bonus payments and capital distributions. Also, if an insured bank subsidiary does not meet the 6 percent supplementary leverage ratio threshold, it would not be permitted to accept brokered deposits without a waiver from the FDIC pursuant to 12 C.F.R. 303.243 and could be subject to additional restrictions by its primary federal supervisor.

FDIC Chairman Martin J. Gruenberg opened the agency’s July 9, 2013, board meeting by noting that “maintenance of a strong base of capital at the largest, most systemically important institutions is particularly important because capital shortfalls at these institutions can contribute to systemic distress and can have material adverse economic effects.”

FDIC Director Jeremiah O. Norton noted, “In my view, the serious shortcomings in the Basel III IFR make it all the more important that the U.S. implement a strong capital standard based on total leverage.” He added, “A meaningful increase in the leverage ratio requirement as a complement to the Basel framework is critical to making considerable progress towards a better financial system.”

FDIC Director Thomas Hoenig “support[s] the FDIC's leadership in proposing to raise the supplemental leverage ratio for the eight largest financial holding companies in the U.S. to 6 percent for the banks and 5 percent for the holding company,” but added, by separating the implementation of Basel III from the supplemental leverage ratio proposal, we gain little and risk a stronger leverage ratio being delayed, or worse, not being adopted.”

Less competitive. Frank Keating, president and chief executive office of the American Bankers Association called the proposal going “beyond Basel II” and making “our nation’s internationally active banks … less competitive with their European counterparts.” Tim Pawlenty, president of the Financial Services Roundtable, echoed the ABA’s concerns of making U.S. banks less competitive and added, “this new proposal, combined with existing capital and leverage requirements, will make it harder for banks to lend and keep the economic recovery going.”

Offsetting true level of risk. On the other hand, the Independent Community Bankers of America® issued a statement strongly supporting the proposed rule. The ICBA noted, “In particular, this rule will target the risky financial instruments that the largest institutions keep off their balance sheets. This will offer a clean, common-sense way to help offset the true level of risk that these megabanks pose to themselves, to consumers, and to our financial system and economy as a whole. While not a panacea, this is a positive step that would go a long way towards helping to safeguard our economic system.”

Companies: Bank of America Corp.; Bank of New York Mellon Corp.; Citigroup Inc.; Goldman Sachs Group Inc.; JPMorgan Chase & Co.; Morgan Stanley; State Street Corp.; Wells Fargo & Co.

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