Agencies propose ‘enhanced supplementary leverage ratio’ for large banks

Further tailoring of leverage ratio requirements to the business activities and risk profiles of the largest domestic firms were proposed by the regulator of national banks and the nation’s central bank Wednesday.

Now, firms that are required to comply with the “enhanced supplementary leverage ratio” are subject to a fixed leverage standard, regardless of their systemic footprint. The proposal issued by the Federal Reserve and the Office of the Comptroller of the Currency (OCC) would instead tie the standard to the risk-based capital surcharge of the firm, which is based on the firm’s individual characteristics, according to a release from the agencies.

The resulting leverage standard would be more closely tailored to each firm, the Fed and OCC said.

The proposal is issued for a 30-day comment period.

“The proposed changes seek to retain a meaningful calibration of the enhanced supplementary leverage ratio standards while not discouraging firms from participating in low-risk activities,” according to the release. “The changes also correspond to recent changes proposed by the Basel Committee on Banking Supervision. Taking into account supervisory stress testing and existing capital requirements, agency staff estimate that the proposed changes would reduce the required amount of tier 1 capital for the holding companies of these firms by approximately $400 million, or approximately 0.04 percent in aggregate tier 1 capital.”

The agencies noted that enhanced supplementary leverage ratio standards apply to all U.S. holding companies identified as global systemically important banking organizations (GSIBs), as well as the insured depository institution subsidiaries of those firms.

GSIBs, the agencies said, must maintain a supplementary leverage ratio of more than 5%, which is the sum of the minimum 3% requirement plus a buffer of 2%, to avoid limitations on capital distributions and certain discretionary bonus payments.

The insured depository institution subsidiaries of the GSIBs must maintain a supplementary leverage ratio of 6% to be considered “well capitalized” under the agencies’ prompt corrective action framework, the agencies noted.

For a holding company, the agencies said, the proposal modifies the fixed 2% buffer to be set to one half of each firm’s risk-based capital surcharge.

For example, the Fed and OCC said, if a GSIB’s risk-based capital surcharge is 2%, it would now be required to maintain a supplementary leverage ratio of more than 4%, which is the sum of the unchanged minimum 3 % requirement plus a modified buffer of 1%.

The proposal would similarly tailor the current 6% requirement for the insured depository institution subsidiaries of GSIBs that are regulated by the Fed and OCC, the agencies said.

Rule Proposed to Tailor ‘Enhanced Supplementary Leverage Ratio’ Requirements