Big banks offered chance to shave elements from supplementary leverage ratio (one regulator dissents)

Treasury securities and deposits at Federal Reserve Banks may be excluded from the calculation of the supplementary leverage ratio calculation by banks and other depository institutions if they so choose, the federal banking agencies announced late Friday.

However, at least among the directors of the board for the federal insurer of bank deposits, the decision was not unanimous.

In a joint release, the Federal Deposit Insurance Corp. (FDIC), Federal Reserve Board, and the Office of the Comptroller of the Currency issued an interim final rule making temporary changes to the supplementary leverage ratio rule.

The rule sets a measure of capital adequacy that applies to large banking organizations. Generally, it covers subsidiaries of bank holding companies with more than $250 billion in total consolidated assets. It requires them to hold a minimum ratio of 3%, measured against their total leverage exposure, with more stringent requirements for the largest and most systemic financial institutions.

Under the interim rule, if a bank does choose to exclude its Treasury securities and Fed bank deposits from the ratio, the agencies said, the bank will be required to request approval from its primary federal banking regulator before making capital distributions, such as paying dividends to its parent company, as long as the exclusion is in effect.

“The agencies are providing this temporary exclusion to enable depository institutions to expand their balance sheets as appropriate to serve as financial intermediaries and serve their customers,” the agencies said. Doing so, the agencies said, would provide credit to households and businesses “in light of the challenges arising from the coronavirus response.”

But the change was not without controversy: Martin Gruenberg, the lone appointed member to the FDIC Board (other than Chairman Jelena McWilliams), voted against the temporary exclusion of the Treasury securities and Federal Reserve bank deposits from the supplementary leverage ratio.

“Given the current severe downturn in the U.S. economy as a result of COVID-19, and the large credit losses U.S. banks may experience over the next twelve months, this is not the time to reduce significantly the leverage capital of the most systemically important banks in the United States,” Gruenberg said in a statement. “Instead, their loss absorbing capacity should be preserved, including by prohibiting capital distributions such as dividends and stock repurchases. For that reason, I will vote against this Interim Final Rule.”

The interim final rule will be effective once it is published in the Federal Register. It will be in effect through March 31, 2021. The agencies will be taking comments on the temporary change for 45 days.

Regulators temporarily change the supplementary leverage ratio to increase banking organizations’ ability to support credit to households and businesses in light of the coronavirus response