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From Banking and Finance Law Daily, April 8, 2014

Large banks to be subject to enhanced leverage standards

By John M. Pachkowski, J.D.

The Board of Directors of the Federal Deposit Insurance Corporation has approved a final rule that will strengthen the agency’s leverage ratio standards for large, interconnected U.S. banking organizations. The Federal Reserve Board, in a separate April 8, 2014 meeting, also approved the leverage ratio standards.

The final rule, which is identical to the proposed rule issued by the FDIC, Federal Reserve Board, and Office of the Comptroller of the Currency, will apply to any U.S. top-tier bank holding company (BHC) with at least $700 billion in total consolidated assets or at least $10 trillion in assets under custody (covered BHC) and any insured depository institution (IDI) subsidiary of these BHCs (covered organizations).

At the time the proposed rule was issued, news reports indicated that the following eight banking organizations would be subject to the supplementary leverage requirements: 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.

Specifically, the final rule will establish enhanced supplementary leverage ratio standards for covered BHCs and their subsidiary IDIs. Any IDI, that is a subsidiary of a covered BHC, will need to maintain a supplementary leverage ratio of at least 6 percent to be “well capitalized” under the agencies’ prompt corrective action framework. Covered BHCs will be required to maintain a supplementary leverage ratio buffer of 2 percent above the minimum supplementary leverage ratio requirement of 3 percent set forth in the revised capital rule issued by the FDIC, OCC, and the Fed in 2013.

The leverage buffer is intended to function like the capital conservation buffer for the risk-based capital ratios found in the agencies’ 2013 revised capital rules. A covered BHC that maintains a leverage buffer of tier 1 capital in an amount greater than 2 percent of its total leverage exposure would not be subject to the limitations on distributions and discretionary bonus payments defined in the 2013 revised capital rule.

During the Fed meeting, Board Chair Janet L. Yellen called the final rule “an important part of the Board’s package of enhanced prudential standards for the most systemic U.S. banking firms—a package that is designed to materially reduce the probability of failure of these firms and to materially reduce the damage that would be done to our financial system if one of these firms were to fail.” Fed Governor Daniel K. Tarullo noted the final rule “would strengthen our multi-pronged capital framework of complementary requirements and standards that focus on different vulnerabilities and therefore compensate for potential shortcomings in any single capital measure.”

FDIC Chairman Martin J. Gruenberg noted, at the start of his agency’s meeting, that the “final rule puts in place a substantial additional buffer of capital that benefits the financial system as a whole and reduces the potential systemic risk these institutions pose.” He added, “The final rule is a substantial strengthening of leverage capital requirements for these institutions that will place additional private capital at risk before the Deposit Insurance Fund, and reduce the likelihood that federal resolution mechanisms would need to be called on.” FDIC Vice Chairman Thomas M. Hoenig recognized the FDIC staff for “their exceptional work” and added, “[b]ecause of their efforts we are preparing to vote on much needed improvements in the standards for judging the adequacy of bank capital that, in total, will serve to enhance the financial stability of the largest banks in the United States and the broader financial industry.” Finally, FDIC Director Jeremiah O. Norton said, “Finalizing a strengthened leverage ratio rule for the very largest banking organizations at 5 percent for bank holding companies and 6 percent for depository institution subsidiaries is an important step towards improving the resiliency of the banking system.”

Tim Pawlenty, Chief Executive Office of the Financial Services Roundtable said, “This rule puts American financial institutions at a clear disadvantage against overseas competitors. It is disappointing this proposal wasn’t further examined by economic experts and will likely result in tighter access to loans for businesses across the country.”

Total leverage exposure. The agencies also approved a proposed rule that would revise the denominator of the supplementary leverage ratio (total leverage exposure) that they adopted as part of their 2013 revised capital rules. The changes to the denominator would address revisions made by the Basel Committee on Banking Supervision in its January 2014 publication entitled, Basel III leverage ratio framework and disclosure requirements (see Banking and Finance Law Daily, Jan. 13, 2014). Specifically, the proposed rule would revise the treatment of on- and off-balance sheet exposures for purposes of determining total leverage exposure, and more closely align the agencies’ rules on the calculation of total leverage exposure with international leverage ratio standards. Comments on the proposed rule are due by June 13, 2014.

“Eligible guarantee” correction. The agencies also approved a second proposed rule that would revise the definition of “eligible guarantee” as incorporated into the agencies’ 2013 revised capital rules. The agencies are issued this proposed rule since they inadvertently limited the recognition of guarantees of wholesale exposures under the advanced approaches risk-based capital rule as incorporated into subpart E of their 2013 capital rules. To address this matter, the proposed rule would remove the requirement that an eligible guarantee be made by an eligible guarantor for purposes of calculating the risk-weighted assets of an exposure, other than a securitization exposure, under the advanced approaches. The proposed change to the definition of eligible guarantee would apply to all banks, savings associations, bank holding companies, and savings and loan holding companies that are subject to the advanced approaches. Comments on this proposed rule are also due by June 13, 2014.

Finally, the FDIC adopted as final their 2013 capital rules which were originally issued on an interim basis.

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

MainStory: TopStory BankHolding BankingOperations CapitalBaselAccords FinancialStability

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