On September 3, 2014, the US banking agencies (the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of Comptroller of the Currency) issued a final rule adjusting the calculation of the supplementary leverage ratio in order to conform to recently adopted recommendations of the Basel Committee of the Bank for International Settlements, which issues standards for bank supervision. The change will result in a strengthened leverage ratio requirement and could require more capital to be held by affected banking organizations in order to comply.
While most capital requirements are based on a risk-based concept (that is, the riskier the asset, the more capital that is required), the leverage ratio is a straightforward calculation of the ratio of core capital elements (such as common stock), called Tier 1 capital, to the bank’s total assets. The minimum leverage ratio is 3 percent. Under the final rule, the largest US bank holding companies (those with more than $700 billion in total consolidated assets or more than $10 trillion in assets under custody) must maintain a leverage buffer of at least 2 percent more, for a total of a minimum 5 percent leverage ratio. Subsidiary banks of these bank holding companies that carry federal deposit insurance must maintain at least a 6 percent leverage ratio.
The capital rules are a series of detailed calculations that need to be made by banking organizations at the holding company level and at the bank level. For those banking organizations that use the “advanced approaches” method of calculating capital (that is, using government-approved internal models to determine their capital requirements), the final rule changes how the supplementary leverage ratio is calculated in order to, as the banking agencies put it, “more appropriately” capture banking organization’s exposure, both on balance sheet and off balance sheet by taking certain additional exposures into account, such as those related to credit derivatives.
The agencies estimate that as a result of this change, affected banking organizations will have to maintain more assets to comply with the revised supplementary leverage ratio requirement. For example, with respect to bank holding companies subject to the final rule, the agencies estimate that they will need to raise in the aggregate approximately $14.5 billion of Tier 1 capital to meet the minimum 5 percent supplementary leverage ratio. This amount is over and above the amount these bank holding companies would have needed to raise in order to comply with the original version of this requirement.
