Global

Details

  • Industry: Financial Services
  • Type: Regulatory update
  • Date: 5/12/2014

Tougher US Leverage Ratio 

While European regulators debate setting national leverage ratios above the 3 percent Basel III minimum, the US FED announced on 4th April 2014 that it would require the eight largest US banks to hold a minimum 5 percent equity to total assets. The FED also indicated that it is considering the need for larger US banks to hold additional risk based capital to address a perceived over-dependence on short-term wholesale funding. Read our analysis (PDF 118 KB) on the supplementary leverage ratio (SLR).

Responding to the news, UBS AG Chairman Axel Weber stated that he expects the Swiss leverage ratio - currently 4.2 percent by 2019 - to “gradually increase”. He also believes that “as soon as a number like that is out and a major constituency adopts this, there’s pressure on everyone else to follow”. This could mean European banks having to raise additional capital and/or reduce their total assets to remain compliant.


However, given the flexibility that increased leverage offer regulators in compensating for perceived weaknesses in RWA calculations, the sector may have to wait until the recommendations coming from the FSB’s Fundamental Review of the Trading Book have been digested before obtaining a final view on local leverage requirements.

Scope of the US leverage ratio requirements

The eight largest US bank holding companies must maintain a 5 percent leverage ratio with their insured depository institution subsidiaries having to maintain 6 percent.


The FED also issued a notice for a proposed rule change to align the calculation basis for the ratio with the Basel III leverage ratio framework and disclosure requirements. This will impact all banks, and not just the top eight subject to the supplemental leverage ratio.

Implementation date

1 January 2018 with disclosure under the Basel III template required from 1 January 2015.

What will this mean in practice?

The Fed staff estimate that the new requirement and revised calculation basis would increase total leverage exposure by 8 percent for the eight bank holding companies, leaving them with a US$68bn aggregate Tier 1 shortfall as at fourth quarter 2013 (compared to $22 billion using the total leverage exposure definition in the 2013 rule).


Note: it would be prudent for other large US bank holding companies subject to the 4 percent leverage ratio requirement to understand the impact of the revised calculation basis on their total leverage exposure and their Tier 1 capital requirements.

Summary

If the top eight banks are to avoid future restrictions on their capital distributions and discretionary bonus payments they will need to hold additional high-quality capital as a percentage of their total on and off-balance sheet exposures. While this may encourage some banks to consider larger management buffers above regulatory capital requirements, such decisions often come at the expense of return on equity.


To discuss further, please contact:

Andrew Davidson

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