On April 11, 2018, the U.S. Board of Governors of the Federal Reserve System and U.S. Office of the Comptroller of the Currency published a joint notice of proposed rulemaking and request for comment that would modify the calculation of the enhanced supplementary leverage ratio for U.S. global systemically important bank holding companies and certain of their insured depository institutions subsidiaries regulated by the Federal Reserve and OCC. The proposal would also make certain conforming changes to the Federal Reserve Board's total loss-absorbing capacity (TLAC) requirements. Under the current framework, in order to avoid constraints on distributions and certain discretionary bonus payments, covered institutions are required to maintain a supplementary leverage ratio of Tier 1 capital against an institution's total leverage exposure of at least three percent, plus an additional leverage buffer of two percent. The proposal retains the three percent minimum SLR requirement, but amends the buffer requirement from two percent to a percentage equal to 50 percent of an institution's GSIB surcharge, which had not been proposed at the time the original enhanced SLR rule was promulgated. The joint release notes that this recalibration will make the requirements serve more as a backstop, rather than a binding constraint, and may incentivize GSIBs to reduce their footprint or undertake more low-risk activities. The joint proposal highlights that this change will result in only a .04 percent ($400 million) reduction in the amount of Tier 1 capital currently held by GSIBs.
The proposal also seeks to modify the prompt corrective action framework for certain insured depository institution subsidiaries of GSIBs regulated by the Federal Reserve and OCC. Currently, insured depository institutions that are subsidiaries of GSIBs must maintain an SLR of 6 percent to be considered "well capitalized" under the PCA framework. The proposal would amend this standard to require an SLR of 3 percent plus 50 percent of the GSIB surcharge applicable to the depository institution's GSIB holding company. The proposal notes that this will lead to an estimated $121 billion reduction in Tier 1 capital among subsidiary insured depository institutions, as compared to the current requirement. The U.S. Federal Deposit Insurance Corporation did not join the Federal Reserve and OCC in issuing this notice. In a separate statement, FDIC Chairman Martin Gruenberg was critical of the proposed reduction, noting that "[s]trengthening leverage capital requirements for the largest, most systemically important banks in the United States was among the most important post-crisis reforms."
The proposal would also amend the Federal Reserve's TLAC rule to replace each GSIB's 2 percent TLAC leverage buffer with a buffer set to 50 percent of the firm's GSIB surcharge, and make certain other conforming changes to Federal Reserve Board rules. Comments on the proposal are due by May 21, 2018.
The full text of the proposed rule is available at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180411a2.pdf?_sm_au_=iVVpJHbpFfNfr7D7.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
