Banking and Finance Law Daily Agencies temporarily adjust supplementary leverage ratio for holding companies
Monday, May 18, 2020

Agencies temporarily adjust supplementary leverage ratio for holding companies

By Colleen M. Svelnis, J.D.

In response to the coronavirus pandemic, the federal banking agencies have temporarily adjusted supplementary leverage ratio requirements for holding companies in order to support the flow of credit and liquidity and ease operational burden.

The federal bank regulatory agencies have made temporary changes to their supplementary leverage ratio rule. The temporary modifications will provide flexibility to certain depository institutions to expand their balance sheets in order to provide credit to households and businesses in light of the challenges arising from the coronavirus response. The interim final rule will allow depository institutions subject to the supplementary leverage ratio to temporarily exclude the on-balance sheet amounts of U.S. Treasury securities and deposits at Federal Reserve Banks from the denominator of the supplementary leverage ratio. Under the interim final rule, issued by the Federal Reserve Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency, any depository institution making this election must request approval from its primary federal banking regulator prior to making certain capital distributions—such as paying dividends—so long as the exclusion is in effect. The tier 1 leverage ratio is not affected by the interim final rule. The interim final rule is effective as of the date of its publication in the Federal Register, and will remain in effect through March 31, 2021.

Supplementary Leverage Ratio. Institutions subject to the supplementary leverage ratio—generally subsidiaries of bank holding companies with more than $250 billion in total consolidated assets—must hold a minimum ratio of 3 percent, measured against their total leverage exposure, with more stringent requirements for the largest and most systemic financial institutions.

The modifications are intended to provide flexibility to certain depository institutions to provide credit to households and businesses in light of the challenges arising from the coronavirus response. FDIC issued a letter to its supervised depository institutions and noted that the interim final rule is only applicable to a depository institution subsidiary of a U.S. global systemically important bank (G-SIB) holding company or a depository institution subject to Category II or Category III capital standards. The OCC issued a bulletin to its institutions stating that the temporary exclusion is intended to enable depository institutions to continue taking deposits, lending, and conducting other financial intermediation activities during this period of financial disruption. FDIC staff also released a memorandum recommending approval of the interim final rule.

FDIC Board statements. According to FDIC Chairman Jelena McWilliams, the interim final rule was necessary because, due to the economic disruption during the coronavirus pandemic, "the flight to liquid assets has resulted in dramatic deposit inflows" and this balance sheet expansion has contributed to insured depository institutions making substantial deposits in their accounts at Federal Reserve Banks and acquiring significant amounts of U.S. Treasury securities. McWilliams warned that these trends may continue while market volatility persists. She stated that without the adjustments in the interim final rule, "the increase in IDIs’ balance sheets may cause a sudden and significant spike in the regulatory capital needed to meet the SLR requirement." The change will support the ability of depository institutions to accommodate customer deposit inflows and serve as financial intermediaries in the U.S. Treasury market without incentivizing taking on additional risk."

Martin J. Gruenberg, member of the FDIC Board of Directors, voted against the rule. He issued a statement explaining his vote. As he explained, the interim final rule could reduce the Supplementary Leverage Ratio requirement for the bank subsidiaries of the eight U.S. (GSIBs) by approximately $55 billion, or about 9 percent, through March 31, 2021. "Given the current severe downturn in the U.S. economy as a result of COVID-19, and the large credit losses U.S. banks may experience over the next twelve months, this is not the time to reduce significantly the leverage capital of the most systemically important banks in the United States. Instead, their loss absorbing capacity should be preserved, including by prohibiting capital distributions such as dividends and stock repurchases," stated Gruenberg. He expressed his belief that the federal banking agencies should instead be acting to preserve the loss absorbing leverage capital of the eight G-SIBS, including a simple prohibition on all capital distributions.

MainStory: TopStory BankHolding BankingFinance BankingOperations CapitalBaselAccords Covid19 FederalReserveSystem FinancialStability PrudentialRegulation

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