April 30, 2019

US Agencies (FDIC, FED, and OCC) are proposing to revise the capital requirements for supplementary leverage ratio, as required by the Economic Growth, Regulatory Relief, and Consumer Protection (EGRRCP) Act. The proposal is to exclude, from the calculations, funds of a bank that have been deposited with central banks, if the banking organization is predominantly engaged in custody, safekeeping, and asset-servicing activities. This consultation ends on July 01, 2019. Based on data available at the time of the proposal, only The Bank of New York Mellon Corporation, Northern Trust Corporation, and State Street Corporation, together with their depository institution subsidiaries, would be able to exclude deposits at central banks from their supplementary leverage ratio.

Section 402 of the EGRRCP Act, which this proposal implements, defines a custodial bank as any depository institution holding company predominantly engaged in custody, safekeeping, and asset-servicing activities, including any insured depository institution subsidiary of such a holding company. The phrase “predominantly engaged in custodial, safekeeping, and asset servicing activities” suggests that the banking organization’s business model is primarily focused on custody, safekeeping, and asset-servicing activities, rather than the other commercial lending, investment banking, or other banking activities. 

Under the proposal, a depository institution holding company would be considered predominantly engaged in custody, safekeeping, and asset-servicing activities if the U.S. top-tier depository institution holding company in the organization has a ratio of assets under custody (AUC)-to-total assets of at least 30:1. The proposal would define such a depository institution holding company, together with any subsidiary depository institution, as a “custodial banking organization.” Under the proposal, a custodial banking organization would exclude deposits placed at a “qualifying central bank” from the denominator of the supplementary leverage ratio. In this proposal, a qualifying central bank would mean a Federal Reserve Bank, ECB, or a central bank of a member country of the Organisation for Economic Co-operation and Development (OECD) if the country’s sovereign exposures qualify for a 0% risk-weight under section 32 of the capital rule and the sovereign debt of such member country is not in default or has not been in default during the previous five years. 

The amount of central bank deposits that could be excluded from the denominator of the supplementary leverage ratio would be limited by the amount of deposit liabilities, on the consolidated balance sheet of the custodial banking organization, that are linked to fiduciary or custody and safekeeping accounts. The supplementary leverage ratio applies only to certain large or internationally active banking organizations.

 

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Keywords: Americas, US, Banking, Supplementary Leverage Ratio, EGRRCP Act, Regulatory Capital, Leverage Ratio, Basel III, US Agencies

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