Bank Prudential Regulation & Regulatory Capital
Two US Banking Regulators Propose Amendments to Supplementary Leverage Ratio Calculations for GSIBs and Their Insured Depository Institution Subsidiaries
On April 11, 2018, the U.S. Board of Governors of the Federal Reserve System and U.S. Office of the Comptroller of the Currency published a joint notice of proposed rulemaking and request for comment that would modify the calculation of the enhanced supplementary leverage ratio for U.S. global systemically important bank holding companies and certain of their insured depository institutions subsidiaries regulated by the Federal Reserve and OCC. The proposal would also make certain conforming changes to the Federal Reserve Board's total loss-absorbing capacity (TLAC) requirements. Under the current framework, in order to avoid constraints on distributions and certain discretionary bonus payments, covered institutions are required to maintain a supplementary leverage ratio of Tier 1 capital against an institution's total leverage exposure of at least three percent, plus an additional leverage buffer of two percent. The proposal retains the three percent minimum SLR requirement, but amends the buffer requirement from two percent to a percentage equal to 50 percent of an institution's GSIB surcharge, which had not been proposed at the time the original enhanced SLR rule was promulgated. The joint release notes that this recalibration will make the requirements serve more as a backstop, rather than a binding constraint, and may incentivize GSIBs to reduce their footprint or undertake more low-risk activities. The joint proposal highlights that this change will result in only a .04 percent ($400 million) reduction in the amount of Tier 1 capital currently held by GSIBs.
The proposal also seeks to modify the prompt corrective action framework for certain insured depository institution subsidiaries of GSIBs regulated by the Federal Reserve and OCC. Currently, insured depository institutions that are subsidiaries of GSIBs must maintain an SLR of 6 percent to be considered "well capitalized" under the PCA framework. The proposal would amend this standard to require an SLR of 3 percent plus 50 percent of the GSIB surcharge applicable to the depository institution's GSIB holding company. The proposal notes that this will lead to an estimated $121 billion reduction in Tier 1 capital among subsidiary insured depository institutions, as compared to the current requirement. The U.S. Federal Deposit Insurance Corporation did not join the Federal Reserve and OCC in issuing this notice. In a separate statement, FDIC Chairman Martin Gruenberg was critical of the proposed reduction, noting that "[s]trengthening leverage capital requirements for the largest, most systemically important banks in the United States was among the most important post-crisis reforms."
The proposal would also amend the Federal Reserve's TLAC rule to replace each GSIB's 2 percent TLAC leverage buffer with a buffer set to 50 percent of the firm's GSIB surcharge, and make certain other conforming changes to Federal Reserve Board rules. Comments on the proposal are due by May 21, 2018.
The full text of the proposed rule is available at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180411a2.pdf?_sm_au_=iVVpJHbpFfNfr7D7
US Federal Reserve Board Proposes to Integrate its Regulatory Capital and Stress Test Rules for Large Banks
On April 10, 2018, the Federal Reserve published a notice of proposed rulemaking and request for comment intended to integrate its capital and stress rules and thereby simplify the capital regime applicable to bank holding companies with $50 billion or more in total consolidated assets and to the U.S. intermediate holding companies of foreign banking organizations. Currently, the standardized approach imposes a static capital conservation buffer of 2.5% of risk-weighted assets. The proposal would replace that with a stress capital buffer equal to the decrease in common equity Tier 1 capital under the severely adverse stress testing scenario plus four quarters of common stock dividends (expressed as a percentage of risk-weighted assets).
The stress capital buffer for an institution, however, cannot be lower than 2.5 percent of an institution's risk-weighted assets. This buffer would apply in addition to the surcharge applicable to GSIB holding companies that are subject to the Federal Reserve's GSIB surcharge, and any applicable countercyclical capital buffer amount. The proposal is intended to streamline the existing regulatory capital regime and would result in a reduction of the total number of requirements applicable to the largest bank holding companies from 24 to 14, while maintaining the overarching objectives of stress testing and capital rules. Failure to maintain the minimums subjects a firm to restrictions on capital distributions and discretionary bonus payments.
The proposal would also create a stress leverage buffer requirement that would be based upon certain capital action assumptions currently used in the Comprehensive Capital Analysis and Review program's supervisory post-stress capital assessment. The proposal seeks to make a number of changes to the Federal Reserve Board's CCAR program itself, as well. This includes replacing the assumption that a firm will carry out all nine quarters of its planned capital actions, with a requirement that firms fund four quarters of common stock dividends; replacing an assumption that results in a firm's balance sheet growing under stress with one that requires that it remain constant; removing the 30 percent dividend ratio that has been used as a threshold for heightened supervisory scrutiny; and eliminating the quantitative objection (i.e., under current rules the Federal Reserve may restrict capital distributions if a firm does not demonstrate an ability to maintain capital levels above minimums under stressful conditions). The proposal notes that had these amendments been in effect during the most recent CCAR exercises, and given the current capital levels of participating firms, no firm would have been required to raise additional capital to avoid limitations on capital distributions. In addition, Federal Reserve Board staff expects the changes to reduce the amount of capital required of non-GSIBs that are subject to CCAR and maintain, or slightly increase, the capital required for GSIBs. Comments on the proposal are due 60 days from the date the notice is published in the Federal Register.
The full text of the proposed rule is available at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180410a2.pdf?_sm_au_=iVVpJHbpFfNfr7D7.
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