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April 11, 2018

FED and OCC proposed a rule that would further tailor leverage ratio requirements to the business activities and risk profiles of the largest domestic firms. Firms that are required to comply with the enhanced supplementary leverage ratio (eSLR) are subject to a fixed leverage standard, regardless of their systemic footprint. The proposal would instead tie the standard to the risk-based capital surcharge of a firm, which is based on the individual characteristics of the firm. The resulting leverage standard would be more closely tailored to each firm. Comments on the rule will be accepted for 30 days after publication in the Federal Register.

The proposed changes seek to retain a meaningful calibration of the eSLR standards while not discouraging firms from participating in low-risk activities. The changes also correspond to recent changes proposed by BCBS. Taking into account supervisory stress testing and the existing capital requirements, the agency staff estimate that the proposed changes would reduce the required amount of tier 1 capital for the holding companies of these firms by approximately USD 400 million, or approximately 0.04% in aggregate tier 1 capital. eSLR standards apply to all U.S. holding companies identified as global systemically important banking organizations (G-SIBs), along with the insured depository institution subsidiaries of these firms.

In the United States, G-SIBs must maintain a supplementary leverage ratio of more than 5%, which is the sum of the minimum 3% requirement plus a buffer of 2%, to avoid limitations on capital distributions and certain discretionary bonus payments. The insured depository institution subsidiaries of G-SIBs must maintain a supplementary leverage ratio of 6% to be considered "well capitalized" under the agencies' prompt corrective action framework. At the holding company level, the proposed rule would modify the fixed 2% buffer to be set to one half of each firm's risk-based capital surcharge. For example, if a G-SIB's risk-based capital surcharge is 2%, it would now be required to maintain a supplementary leverage ratio of more than 4%, which is the sum of the unchanged minimum 3% requirement plus a modified buffer of 1%. The proposal would similarly tailor the current 6% requirement for the insured depository institution subsidiaries of G-SIBs that are regulated by FED and OCC.

 

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Comment Due Date: Federal Register + 30 days

Keywords: Americas, US, Banking, Leverage Ratio, eSLR, G-SIB, Risk-based Capital Surcharge, TLAC, OCC, FED

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