The Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (collectively, the Agencies) approved a final rule on April 8, 2014 that imposes an enhanced supplementary leverage ratio (SLR) requirement on any top-tier U.S. bank holding company (BHC) that has more than $700 billion in total consolidated assets or more than $10 trillion in assets under custody (covered BHCs) as well as any insured depository institution (IDI) of those covered BHCs. Under the rule, beginning January 1, 2018:
- Covered BHCs will be required to hold additional tier 1 capital to exceed a 2 percent leverage buffer (the enhanced supplementary leverage ratio) in addition to the minimum SLR of 3 percent (which is applicable to entities subject to the Advanced Approaches risk-based capital rules (AA Banks) under the U.S. rules implementing the Basel III capital framework (US Basel III rules)); and
- IDIs of the covered BHCs will be required to meet at least a 6 percent SLR (3 percent above the minimum Basel III SLR) in order to be considered “well capitalized” for Prompt Corrective Action purposes.
Covered BHCs that fail to exceed the 2 percent enhanced SLR will face restrictions, subject to a sliding scale, with regard to dividend distributions and discretionary bonus payouts. IDIs not achieving classification as “well capitalized” are similarly subject to regulatory limitations.
Also on April 8, the Agencies adopted a proposed rule that would revise the denominator used to calculate a banking organization’s SLR under the U.S. Basel III rules. The revisions would modify the treatment of on- and off-balance sheet exposures to “more closely align the Agencies’ rules on the calculation of total leverage exposure with international leverage ratio standards,” which were modified by the Basel Committee on Banking Supervision (Basel Committee) in January 2014. Comments on the proposed changes to the denominator are due to the Agencies no later than June 13, 2014. The proposed rule is applicable to all banks, savings associations, bank holding companies, and savings and loan holding companies that are AA Banks, including covered BHCs and their subsidiary IDIs subject to the enhanced SLR rule. It is important to understand that while the enhanced SLR applies to only the largest institutions, the proposed revisions to the denominator of the SLR would apply to a broader set of institutions. Some firms may find that the revised calculation has serious capital implications.
All AA Banks are required to begin to calculate and report the SLR beginning January 1, 2015 and to comply with the minimum ratio requirement beginning January 1, 2018.