Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio Standards for Certain Bank Holding Companies and Their Subsidiary Insured Depository Institutions, 24528-24541 [2014-09367]
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Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Rules and Regulations
DEPARTMENT OF TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 6
[Docket ID OCC–2013–0008]
RIN 1557–AD69
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 217
[Regulation H and Q; Docket No. R–1460]
RIN 7100–AD 99
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 324
RIN 3064–AE01
Regulatory Capital Rules: Regulatory
Capital, Enhanced Supplementary
Leverage Ratio Standards for Certain
Bank Holding Companies and Their
Subsidiary Insured Depository
Institutions
Office of the Comptroller of
the Currency, Treasury; the Board of
Governors of the Federal Reserve
System; and the Federal Deposit
Insurance Corporation.
ACTION: Final rule.
AGENCIES:
The Office of the Comptroller
of the Currency (OCC), the Board of
Governors of the Federal Reserve
System (Board), and the Federal Deposit
Insurance Corporation (FDIC)
(collectively, the agencies) are adopting
a final rule that strengthens the
agencies’ supplementary leverage ratio
standards for large, interconnected U.S.
banking organizations (the final rule).
The final rule applies to any U.S. toptier bank holding company (BHC) with
more than $700 billion in total
consolidated assets or more than $10
trillion in assets under custody (covered
BHC) and any insured depository
institution (IDI) subsidiary of these
BHCs (together, covered organizations).
In the revised regulatory capital rule
adopted by the agencies in July 2013
(2013 revised capital rule), the agencies
established a minimum supplementary
leverage ratio of 3 percent, consistent
with the minimum leverage ratio
adopted by the Basel Committee on
Banking Supervision (BCBS), for
banking organizations subject to the
agencies’ advanced approaches riskbased capital rules. The final rule
establishes enhanced supplementary
leverage ratio standards for covered
BHCs and their subsidiary IDIs. Under
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SUMMARY:
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the final rule, an IDI that is a subsidiary
of a covered BHC must maintain a
supplementary leverage ratio of at least
6 percent to be well capitalized under
the agencies’ prompt corrective action
(PCA) framework. The Board also is
adopting in the final rule a
supplementary leverage ratio buffer
(leverage buffer) for covered BHCs of 2
percent above the minimum
supplementary leverage ratio
requirement of 3 percent. The leverage
buffer functions like the capital
conservation buffer for the risk-based
capital ratios in the 2013 revised capital
rule. A covered BHC that maintains a
leverage buffer of tier 1 capital in an
amount greater than 2 percent of its total
leverage exposure is not subject to
limitations on distributions and
discretionary bonus payments under the
final rule.
Elsewhere in today’s Federal Register,
the agencies are proposing changes to
the 2013 revised capital rule’s
supplementary leverage ratio, including
changes to the definition of total
leverage exposure, which would apply
to all advanced approaches banking
organizations and thus, if adopted,
would affect banking organizations
subject to this final rule.
DATES: The final rule is effective January
1, 2018.
FOR FURTHER INFORMATION CONTACT:
OCC: Roger Tufts, Senior Economic
Advisor, (202) 649–6981; Nicole Billick,
Risk Expert, (202) 649–7932, Capital
Policy; or Carl Kaminski, Counsel; or
Henry Barkhausen, Attorney, Legislative
and Regulatory Activities Division,
(202) 649–5490, Office of the
Comptroller of the Currency, 400 7th
Street SW., Washington, DC 20219.
Board: Constance M. Horsley,
Assistant Director, (202) 452–5239; Juan
C. Climent, Senior Supervisory
Financial Analyst, (202) 872–7526; or
Sviatlana Phelan, Senior Financial
Analyst, (202) 912–4306, Capital and
Regulatory Policy, Division of Banking
Supervision and Regulation; or
Benjamin McDonough, Senior Counsel,
(202) 452–2036; April C. Snyder, Senior
Counsel, (202) 452–3099; or Mark C.
Buresh, Attorney, (202) 452–5270, Legal
Division, Board of Governors of the
Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551. For
the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), (202) 263–4869.
FDIC: George French, Deputy
Director, gfrench@fdic.gov; Bobby R.
Bean, Associate Director, bbean@
fdic.gov; Ryan Billingsley, Chief, Capital
Policy Section, rbillingsley@fdic.gov;
Karl Reitz, Chief, Capital Markets
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Strategies Section, kreitz@fdic.gov;
Capital Markets Branch, Division of Risk
Management Supervision,
regulatorycapital@fdic.gov or (202) 898–
6888; or Mark Handzlik, Counsel,
mhandzlik@fdic.gov; Michael Phillips,
Counsel, mphillips@fdic.gov; Rachel
Ackmann, Senior Attorney, rackmann@
fddic.gov; Supervision Branch, Legal
Division, Federal Deposit Insurance
Corporation, 550 17th Street NW.,
Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Background
On August 20, 2013, the agencies
published in the Federal Register, for
public comment, a joint notice of
proposed rulemaking (the 2013 NPR) to
strengthen the agencies’ supplementary
leverage ratio standards for large,
interconnected U.S. banking
organizations.1 As noted in the 2013
NPR, the recent financial crisis showed
that some financial companies had
grown so large, leveraged, and
interconnected that their failure could
pose a threat to overall financial
stability. The sudden collapses or nearcollapses of major financial companies
were among the most destabilizing
events of the crisis. As a result of the
imprudent risk taking of major financial
companies and the severe consequences
to the financial system and the economy
associated with the disorderly failure of
these companies, the U.S. government
(and many foreign governments in their
home countries) intervened on an
unprecedented scale to reduce the
impact of, or prevent, the failure of
these companies and the attendant
consequences for the broader financial
system.
A perception persists in the markets
that some companies remain ‘‘too big to
fail,’’ posing an ongoing threat to the
financial system. First, the perception
that certain companies are ‘‘too big to
fail’’ reduces the incentives of
shareholders, creditors and
counterparties of these companies to
discipline excessive risk-taking by the
companies. Second, it produces
competitive distortions because those
companies can often fund themselves at
a lower cost than other companies. This
distortion is unfair to smaller
companies, damaging to fair
competition, and may artificially
encourage further consolidation and
concentration in the financial system.
An important objective of the DoddFrank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank Act)
is to mitigate the threat to financial
stability posed by systemically1 78
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important financial companies.2 The
agencies have sought to address this
concern through enhanced supervisory
programs, including heightened
supervisory expectations for large,
complex institutions and stress testing
requirements. In addition, the DoddFrank Act mandates the implementation
of a multi-pronged approach to address
this concern: A new orderly liquidation
authority for financial companies (other
than banks and insurance companies);
the establishment of the Financial
Stability Oversight Council, empowered
with the authority to designate nonbank
financial companies for Board
supervision (designated nonbank
financial companies); stronger
regulation of large BHCs and designated
nonbank financial companies through
enhanced prudential standards; and
enhanced regulation of over-the-counter
(OTC) derivatives, other core financial
markets and financial market utilities.
This final rule builds on these efforts
by adopting enhanced supplementary
leverage ratio standards for the largest
and most interconnected U.S. banking
organizations. The agencies have broad
authority to set regulatory capital
standards.3 As a general matter, the
agencies’ authority to set regulatory
capital requirements and standards for
the institutions they regulate derives
from the International Lending
Supervision Act (ILSA) 4 and the PCA
provisions 5 of the Federal Deposit
Insurance Act (FDIA). In enacting ILSA,
Congress codified its intentions,
providing that ‘‘it is the policy of the
Congress to assure that the economic
health and stability of the United States
and the other nations of the world shall
not be adversely affected or threatened
in the future by imprudent lending
practices or inadequate supervision.’’ 6
ILSA encourages the agencies to work
with their international counterparts to
establish effective and consistent
supervisory policies, standards, and
practices and specifically provides the
agencies authority to set broadly
applicable minimum capital levels 7 as
2 See, e.g., Public Law 111–203, 124 Stat. 1376,
1394, 1571, 1803 (2010).
3 The agencies have authority to establish capital
requirements for depository institutions under the
prompt corrective action provisions of the Federal
Deposit Insurance Act (12 U.S.C. 1831o). In
addition, the Federal Reserve has broad authority to
establish various regulatory capital standards for
BHCs under the Bank Holding Company Act and
the Dodd-Frank Act. See, for example, sections 165
and 171 of the Dodd-Frank Act (12 U.S.C. 5365 and
12 U.S.C. 5371).
4 12 U.S.C. 3901–3911.
5 12 U.S.C. 1831o.
6 12 U.S.C. 3901(a).
7 ‘‘Each appropriate Federal banking agency shall
cause banking institutions to achieve and maintain
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well as individual capital
requirements.8 Additionally, ILSA
specifically directs U.S. regulators to
encourage governments, central banks,
and bank regulatory authorities in other
major banking countries to work toward
maintaining and, where appropriate,
strengthening the capital bases of
banking institutions involved in
international banking.9 With its focus
on international lending and the safety
of the broader financial system, ILSA
provides the agencies with the authority
to consider an institution’s
interconnectedness and other systemic
factors when setting capital standards.
As part of the overall prudential
framework for bank capital, the agencies
have long expected institutions to
maintain capital well above regulatory
minimums and have monitored banking
organizations’ capital adequacy through
the supervisory process in accordance
with this expectation. This expectation
is also codified for IDIs in the statutory
PCA framework, which requires the
agencies to establish capital ratio
thresholds for both leverage and riskbased capital that banking organizations
must satisfy to be considered well
capitalized.
Additionally, section 165 of the DoddFrank Act requires the Board to develop
enhanced prudential standards for BHCs
with total consolidated assets of $50
billion or more and for designated
nonbank companies (together, section
165 covered companies).10 The DoddFrank Act requires that prudential
standards for section 165 covered
companies include enhanced leverage
standards. In general, the Dodd-Frank
Act directs the Board to implement
enhanced prudential standards that
strengthen existing micro-prudential
supervision and regulation of individual
companies and incorporate macroprudential considerations to reduce
threats posed by section 165 covered
companies to the stability of the
financial system as a whole. The
enhanced prudential standards must
increase in stringency based on the
systemic footprint and risk
characteristics of individual companies.
When differentiating among companies
adequate capital by establishing levels of capital for
such banking institutions and by using such other
methods as the appropriate Federal banking agency
deems appropriate.’’ 12 U.S.C. 3907(a)(1).
8 ‘‘Each appropriate Federal banking agency shall
have the authority to establish such minimum level
of capital for a banking institution as the
appropriate Federal banking agency, in its
discretion, deems to be necessary or appropriate in
light of the particular circumstances of the banking
institution.’’ 12 U.S.C. 3907(a)(2).
9 12 U.S.C. 3907(b)(3)(C).
10 See 12 U.S.C. 5365; 77 FR 593 (January 5,
2012); and 77 FR 76627 (December 28, 2012).
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for purposes of applying the standards
established under section 165, the Board
may consider the companies’ size,
capital structure, riskiness, complexity,
financial activities, and any other riskrelated factors the Board deems
appropriate.11
In the agencies’ experience, strong
capital is an important safeguard that
helps financial institutions navigate
periods of financial or economic stress.
Maintenance of a strong capital base at
the largest, systemically important
institutions is particularly important
because capital shortfalls at these
institutions can contribute to systemic
distress and can have material adverse
economic effects. Higher capital
standards for these institutions would
place additional private capital at risk,
thereby reducing the risks for the
Deposit Insurance Fund while
improving the ability of these
institutions to serve as a source of credit
to the economy during times of
economic stress. Furthermore, the
agencies believe that the enhanced
supplementary leverage ratio standards
would reduce the likelihood of
resolutions, and would allow regulators
to tailor resolution efforts were a
resolution to become necessary. By
further enhancing the capital strength of
covered organizations, the enhanced
supplementary leverage ratio standards
could counterbalance possible funding
cost advantages that these organizations
may enjoy as a result of being perceived
as ‘‘too big to fail.’’
A. The Supplementary Leverage Ratio
The 2013 revised capital rule
comprehensively revises and
strengthens the capital regulations
applicable to banking organizations.12 It
strengthens the definition of regulatory
capital, increases the minimum riskbased capital requirements for all
banking organizations, and modifies the
requirements for how banking
organizations calculate risk-weighted
assets. The 2013 revised capital rule
also retains the generally applicable
leverage ratio requirement (generally
applicable leverage ratio) that the
agencies believe to be a simple and
transparent measure of capital adequacy
that is credible to market participants
and ensures a meaningful amount of
capital is available to absorb losses. The
minimum generally applicable leverage
11 12
U.S.C. 5365(a)(2)(A).
FR 55340 (September 10, 2013) (FDIC) and
78 FR 62018 (October 11, 2013) (OCC and Board).
On April 8, 2014, the FDIC adopted as final the
2013 revised capital rule, with no substantive
changes.
12 78
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ratio requirement 13 of 4 percent applies
to all IDIs, and is the ‘‘generally
applicable’’ leverage ratio for purposes
of section 171 of the Dodd-Frank Act.
Accordingly, the minimum tier 1
leverage ratio requirement for
depository institution holding
companies is also 4 percent.14
In the 2013 revised capital rule, the
agencies established a minimum
supplementary leverage ratio
requirement of 3 percent for banking
organizations subject to the banking
agencies’ advanced approaches rules
(advanced approaches banking
organizations) 15 based on the BCBS’s
Basel III leverage ratio (Basel III leverage
ratio) as it was established at the time.16
The agencies believe the introduction of
the leverage ratio by the BCBS is an
important step in improving the
framework for international capital
standards. The Basel III leverage ratio is
a non-risk-based measure of tier 1
capital relative to an exposure amount
that includes both on- and off-balance
sheet exposures. The agencies
implemented the Basel III leverage ratio
through the supplementary leverage
ratio, which the agencies believe to be
particularly relevant for large, complex
organizations that are internationally
active and often have substantial offbalance sheet exposures.
The agencies’ supplementary leverage
ratio is the arithmetic mean of the ratio
of an advanced approaches banking
organization’s tier 1 capital to total
13 The generally applicable leverage ratio under
the 2013 revised capital rule is the ratio of a
banking organization’s tier 1 capital to its average
total consolidated assets as reported on the banking
organization’s regulatory report minus amounts
deducted from tier 1 capital.
14 12 U.S.C. 5371.
15 A banking organization is subject to the
advanced approaches rule if it has consolidated
assets of at least $250 billion, if it has total
consolidated on-balance sheet foreign exposures of
at least $10 billion, if it elects to apply the advanced
approaches rule, or it is a subsidiary of a depository
institution, bank holding company, or savings and
loan holding company that uses the advanced
approaches to calculate risk-weighted assets. See 78
FR 62018, 62204 (October 11, 2013); 78 FR 55340,
55523 (September 10, 2013).
16 The BCBS is a committee of banking
supervisory authorities, which was established by
the central bank governors of the G–10 countries in
1975. It currently consists of senior representatives
of bank supervisory authorities and central banks
from Argentina, Australia, Belgium, Brazil, Canada,
China, France, Germany, Hong Kong SAR, India,
Indonesia, Italy, Japan, Korea, Luxembourg, Mexico,
the Netherlands, Russia, Saudi Arabia, Singapore,
South Africa, Sweden, Switzerland, Turkey, the
United Kingdom, and the United States. Documents
issued by the BCBS are available through the Bank
for International Settlements Web site at https://
www.bis.org. See BCBS, ‘‘Basel III: A global
regulatory framework for more resilient banks and
banking systems’’ (December 2010 (revised June
2011)), available at https://www.bis.org/publ/
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leverage exposure (each as defined in
the 2013 revised capital rule) calculated
as of the last day of each month in the
reporting quarter. In contrast to the
denominator of the agencies’ generally
applicable leverage ratio, which
includes only on-balance sheet assets,
the denominator for the supplementary
leverage ratio is based on a banking
organization’s total leverage exposure,
which includes all on-balance sheet
assets and many off-balance sheet
exposures. The 2013 revised capital rule
requires that an advanced approaches
banking organization calculate and
report its supplementary leverage ratio
beginning in 2015 and maintain a
supplementary leverage ratio of at least
3 percent beginning in 2018.
Because total leverage exposure
includes off-balance sheet exposures, for
any given company with material offbalance sheet exposures the amount of
capital required to meet the
supplementary leverage ratio will
exceed the amount of capital that is
required to meet the generally
applicable leverage ratio, assuming that
both ratios are set at the same level. To
illustrate, as the agencies noted in the
2013 NPR, based on supervisory
estimates for a group of advanced
approaches banking organizations using
supervisory data as of third quarter
2012,17 a 5 percent supplementary
leverage ratio corresponds to roughly a
7.2 percent generally applicable
leverage ratio and a 6 percent
supplementary leverage ratio
corresponds to roughly an 8.6 percent
generally applicable leverage ratio.
According to supervisory estimates,
2013 data yield similar results. These
estimates represent averages and the
numbers vary from institution to
institution.
The agencies noted in the 2013
revised capital rule and in the 2013 NPR
that the BCBS planned to collect
additional data from institutions in
member countries and potentially make
adjustments to the Basel III leverage
ratio requirement. The agencies
indicated that they would review any
modifications to the Basel III leverage
ratio made by the BCBS and consider
proposing to modify the supplementary
leverage ratio consistent with those
revisions, as appropriate.
In June 2013, the BCBS published and
requested comment on a consultative
paper that proposed significant
modifications to the denominator of the
Basel III leverage ratio (consultative
17 The supervisory estimates were generated
using CCAR September 2012 and CCAR September
2013 data.
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paper).18 The consultative paper
proposed a number of approaches that
generally would increase the
denominator of the leverage ratio
originally set out in the 2010 Basel III
framework. Based on its review of
comments on the consultative paper, in
January 2014, the BCBS adopted certain
aspects of the proposals in the
consultative paper as well as other
changes to the denominator (BCBS 2014
revisions).19 The BCBS has indicated
that it will continue to study the Basel
III leverage ratio through the
implementation phase into 2017 and
will consider further modifications to
the ratio.
As discussed further below, several
commenters raised concerns about the
agencies’ intention to adopt the
proposed enhanced supplementary
leverage ratio standards while the BCBS
continues to revise the Basel III leverage
ratio. The agencies believe that it is
important to maintain consistency with
international standards, as appropriate,
for internationally active banking
organizations and, accordingly, have
published a separate notice of proposed
rulemaking elsewhere in today’s
Federal Register that seeks public
comment on revisions to the
denominator of the supplementary
leverage ratio that would be applicable
to advanced approaches banking
organizations (2014 NPR). These
proposed revisions are generally
consistent with the BCBS 2014
revisions.
The agencies also believe that it is
important to establish enhanced
supplementary leverage ratio standards
for the largest, most interconnected
banking organizations to strengthen the
overall regulatory capital framework in
the United States. Therefore, after
reviewing comments on the 2013 NPR,
the agencies are finalizing the enhanced
supplementary leverage ratio standards
substantially as proposed, based on the
methodology for determining the
supplementary leverage ratio in the
2013 revised capital rule. As discussed
further below, the agencies believe the
proposed changes to the supplementary
leverage ratio denominator in the 2014
NPR would be responsive to some of the
concerns that commenters raised in
connection with the 2013 NPR. The
agencies will carefully consider all
comments received on the proposed
revisions to the supplementary leverage
18 See BCBS ‘‘Revised Basel III leverage ratio
framework and disclosure requirements—
consultative document’’ (June 2013) available at
https://www.bis.org/publ/bcbs251.htm.
19 See BCBS ‘‘Basel III leverage ratio framework
and disclosure requirements’’ (January 2014)
available at https://www.bis.org/publ/bcbs270.htm.
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ratio calculation in the 2014 NPR,
including those related to the impact of
the proposed changes on advanced
approaches banking organizations’
capital requirements.
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B. The Proposed Enhanced
Supplementary Leverage Ratio
Standards
The 2013 NPR proposed applying
enhanced supplementary leverage
standards to any U.S. top-tier BHC that
has more than $700 billion in total
consolidated assets or more than $10
trillion in assets under custody and any
IDI subsidiary of such a BHC.20 As
explained in the 2013 NPR, the list of
covered BHCs identified by these
thresholds is consistent with the list of
banking organizations that meet the
BCBS definition of a global systemically
important bank (G–SIB), based on yearend 2011 data.21 In November 2011, the
BCBS released a document entitled,
Global Systemically Important Banks
(G–SIBs): Assessment methodology and
the additional loss absorbency
requirement, which sets out a
framework for a new capital surcharge
for G–SIBs (BCBS G–SIB framework).22
The BCBS G–SIB framework
incorporates five broad characteristics of
a banking organization that the agencies
consider to be good proxies for, and
correlated with, systemic importance:
Size, complexity, interconnectedness,
lack of substitutes, and cross-border
activity. Further, the Board believes that
the criteria and methodology used by
the BCBS to identify G–SIBs are
consistent with the criteria it must
consider under the Dodd-Frank Act
when tailoring enhanced prudential
standards based on the systemic
footprint and risk characteristics of
individual section 165 covered
companies.23
20 Under the 2013 NPR, applicability of the
proposed enhanced supplementary leverage ratio
standards would have been determined based on
assets reported on a BHC’s most recent
Consolidated Financial Statement for Bank Holding
Companies (FR Y–9C) or based on assets under
custody as reported on a BHC’s most recent Banking
Organization Systemic Risk Report (FR Y–15).
21 In November 2012, the Financial Stability
Board and BCBS published a list of banks that meet
the BCBS definition of a G–SIB based on year-end
2011 data. A revised list based on year-end 2012
data was published November 11, 2013 (available
at https://www.financialstabilityboard.org/
publications/r_131111.pdf). The U.S. top-tier bank
holding companies that are currently identified as
G–SIBs are Bank of America Corporation, The Bank
of New York Mellon Corporation, Citigroup Inc.,
Goldman Sachs Group, Inc., JP Morgan Chase & Co.,
Morgan Stanley, State Street Corporation, and Wells
Fargo & Company.
22 Available at https://www.bis.org/publ/
bcbs207.pdf. The BCBS published a revised version
of this document in July 2013, available at https://
www.bis.org/publ/bcbs255.pdf.
23 See 12 U.S.C. 5365(a).
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Under the 2013 NPR, a covered BHC
would have been subject to a leverage
buffer composed of tier 1 capital, in
addition to the minimum 3 percent
supplementary leverage ratio
requirement established in the 2013
revised capital rule. Under the 2013
NPR, a covered BHC that maintains a
leverage buffer of tier 1 capital in an
amount greater than 2 percent of its total
leverage exposure would not have been
subject to limitations on its distributions
and discretionary bonus payments. If a
covered BHC were to maintain a
leverage buffer of 2 percent or less, it
would have been subject to increasingly
strict limitations on its distributions and
discretionary bonus payments. The
proposed leverage buffer followed the
same general mechanics and structure
as the capital conservation buffer
contained in the 2013 revised capital
rule. Any constraints on distributions
and discretionary bonus payments
resulting from a covered BHC
maintaining a leverage buffer of 2
percent or less would have been
independent of any constraints imposed
by the capital conservation buffer or
other supervisory or regulatory
measures.
As noted in the 2013 NPR, the 2013
revised capital rule incorporated the 3
percent supplementary leverage ratio
minimum requirement into the PCA
framework as an adequately capitalized
threshold for IDIs subject to the
advanced approaches risk-based capital
rules, but did not establish a wellcapitalized threshold for this ratio.
Under the 2013 NPR, an IDI that is a
subsidiary of a covered BHC would have
been required to satisfy a 6 percent
supplementary leverage ratio to be
considered well-capitalized for PCA
purposes.
II. Summary of Comments on the 2013
NPR
The agencies sought comment on all
aspects of the 2013 NPR and received
approximately 30 public comments
from banking organizations, trade
associations representing the banking or
financial services industry, supervisory
authorities, public interest advocacy
groups, private individuals, members of
Congress, and other interested parties.
In general, comments from financial
services firms, banking organizations,
banking trade associations and other
industry groups were critical of the 2013
NPR, while comments from
organizations representing smaller
banks or their supervisors, public
interest advocacy groups and the public
generally were supportive of the 2013
NPR. A detailed discussion of
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commenters’ concerns and the agencies’
response follows.
A. Timing of the Final Rule
A number of commenters made
reference to the BCBS consultative
paper that proposed to revise the
denominator for the Basel III leverage
ratio.24 While the proposals outlined in
the BCBS consultative paper were not
part of the 2013 NPR, commenters
stated that they believe the final BCBS
changes eventually will be incorporated
into the U.S. supplementary leverage
ratio, and that it would be premature to
finalize the 2013 NPR before the BCBS
process is complete. Commenters
recommended that a final rule adopting
the proposed enhanced supplementary
leverage ratio standards be delayed until
the BCBS finalized the consultative
paper and the Board adopted a final rule
implementing enhanced prudential
standards under section 165 of the Dodd
Frank Act.25 In addition, these
commenters argued that the proposed
enhanced supplementary leverage ratio
standards, if applied in conjunction
with the denominator changes proposed
in the BCBS consultative paper, would
result in inappropriately high capital
charges.
The agencies emphasize that the 2013
NPR did not propose or seek comment
on the revisions to the supplementary
leverage ratio denominator that were
being considered by the BCBS. The
agencies are moving forward with the
finalization of the proposed enhanced
supplementary leverage ratio standards
to further enhance the capital position
of covered organizations and to
strengthen financial stability. As noted
earlier, the agencies are seeking
comment elsewhere in today’s Federal
Register on the 2014 NPR, which
proposes revisions to the definition of
total leverage exposure in the 2013
revised capital rule as well as other
proposed requirements relating to the
supplementary leverage ratio that would
reflect the BCBS 2014 revisions. The
24 See BCBS, ‘‘Revised Basel III leverage ratio
framework and disclosure requirements—
consultative document’’ (June 2013), available at
https://www.bis.org/publ/bcbs251.htm.
25 The Board’s proposed rules to implement the
provisions of sections 165 and 166 of the DoddFrank Act for bank holding companies with total
consolidated assets of $50 billion or more and for
nonbank financial firms supervised by the Board
(domestic proposal) and for foreign banking
organizations with total consolidated assets of $50
billion or more and foreign nonbank financial
companies supervised by the Board (foreign
proposal) can be found at 77 FR 594 (January 5,
2012) and 77 FR 76628 (December 28, 2012) for the
domestic proposal and foreign proposal,
respectively. The Board’s final rule implementing
these provisions is available at https://
www.federalreserve.gov/newsevents/press/bcreg/
20140218a.htm.
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agencies believe that the proposed
revisions to the definition of total
leverage exposure in the 2014 NPR are
responsive to a number of concerns that
commenters expressed about the
relationship between the BCBS process
and the supplementary leverage ratio.
As noted above, the agencies will
carefully review all comments received
on the 2014 NPR.
B. Scope of Application
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The 2013 NPR would have applied
enhanced supplementary leverage ratio
standards to the largest, most
interconnected U.S. BHCs and their
subsidiary IDIs (specifically, to any U.S.
top-tier BHC with more than $700
billion in total consolidated assets or
more than $10 trillion in assets under
custody and any IDI subsidiary of these
BHCs).26 Several commenters criticized
the 2013 NPR’s scope of application,
including the proposed quantitative
thresholds for determining applicability
of the enhanced supplementary leverage
ratio standards. These commenters
stated that tying the application of the
2013 NPR to size alone would not be
appropriate, as size is not always a
reliable indicator of the degree of risk to
financial stability. In addition,
commenters stated that the quantitative
thresholds may capture the G–SIBs
today, but there is no assurance that this
will be the case in the future. A few
commenters asserted that applicability
should be based on the systemic risk
posed by an institution’s failure and not
just on quantitative thresholds. For
instance, one commenter suggested
extending the applicability of the final
rule beyond the largest financial
institutions to institutions that are
smaller, but nonetheless are integral
parts of the financial system. A few
commenters favored expanding the
quantitative thresholds of the 2013 NPR
to include additional banking
organizations, for example, by applying
the proposed enhanced supplementary
leverage ratio standards to all advanced
approaches banking organizations.
Some commenters asserted that using
assets under custody as one of the
metrics to determine the 2013 NPR’s
applicability significantly overstates the
risk of the custody bank business model.
In addition, several commenters
suggested that it is not clear that the
26 Under the 2013 revised capital rule, a
‘‘subsidiary’’ is defined as a company controlled by
another company, and a person or company
‘‘controls’’ a company if it: (1) Owns, controls, or
holds with power to vote 25 percent or more of a
class of voting securities of the company; or (2)
consolidates the company for financial reporting
purposes. See section 2 of the 2013 revised capital
rule.
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enhanced supplementary leverage ratio
standards are necessary or appropriate
for any organization. These commenters
stated that substantial steps have been
taken toward addressing ‘‘too big to fail’’
concerns, and that the 2013 NPR should
not be extended to banking
organizations that, in the commenters’
view, may not present systemic risk.
The agencies have decided to finalize
the proposed enhanced supplementary
leverage ratio standards, including the
proposed applicability thresholds,
substantively as proposed. In the
agencies’ view, the proposed asset
thresholds capture banking
organizations that are so large or
interconnected that they pose
substantial systemic risk. As explained
above, these banking organizations have
also been identified by the BCBS as G–
SIBs, which are subject to heightened
risk-based capital standards under the
Basel framework. The agencies believe
the application of the enhanced
supplementary leverage ratio standards
to covered organizations is an
appropriate way to further strengthen
the ability of the these organizations to
remain a going concern during times of
economic stress and to minimize the
likelihood that problems at these
organizations would contribute to
financial instability.
The agencies continue to believe that
the benefits to financial stability of the
enhanced supplementary leverage ratio
standards are most pronounced for these
large and systemically important
institutions, and have decided not to
extend these enhanced standards to
smaller institutions. In addition, as also
discussed in the 2013 NPR, it is
anticipated that over time, as the BCBS
G–SIB framework is implemented in the
United States or revised by the BCBS,
the agencies may consider modifying
the scope of application of the enhanced
supplementary leverage ratio standards
to align more closely with the scope of
application of the BCBS G–SIB
framework. In addition, the agencies
will otherwise continue to evaluate the
applicability thresholds and may
consider revising them in the future to
ensure they remain appropriate.
C. Calibration of the Enhanced
Supplementary Leverage Ratio
Standards
The agencies received several
comments expressing concern with the
proposed calibration of the enhanced
supplementary leverage ratio standards.
Commenters stated that the proposed
enhanced supplementary leverage ratio
standards should be set no higher than
those that would apply to banking
organizations in other jurisdictions to
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maintain the competitive position of
covered organizations with respect to
their foreign competitors. A number of
commenters viewed the proposed
calibration as arbitrary, stating that it
should be supported by quantitative
studies of the cumulative impact of the
enhanced supplementary leverage ratio
standards and other financial reforms on
the ability of U.S. banking organizations
to provide financial services to
customers and businesses. A number of
commenters stated that the 2013 NPR
would cause the supplementary
leverage ratio to become the binding
regulatory capital constraint, rather than
a backstop to the risk-based capital
measures, and expressed concern that
an unintended consequence of a binding
supplementary leverage ratio could be
that covered organizations would divest
lower risk assets and instead assume
more risk, to the detriment of financial
stability.
Some commenters expressed concern
that a binding supplementary leverage
ratio could have negative consequences,
including the creation of disincentives
for banking organizations to engage in
robust risk assessment and management
practices. Furthermore, according to
commenters, the 2013 NPR could
incentivize banking organizations to
engage in financial activities with a
higher risk-reward profile as there
would be no regulatory capital benefit
for holding low-risk assets, potentially
resulting in institutions that are less
stable. For instance, one commenter
stated that unsecured commercial loans
would be more attractive than secured
lines of credit because the former have
a stronger return on assets and both
would require equal amounts of
regulatory capital under the
supplementary leverage ratio
framework. The commenter warned that
in the mortgage banking industry, this
could constrain warehouse lines of
credit needed to finance the production
of new mortgages and mortgage-backed
securities. Another commenter stated
that the proposed enhanced
supplementary leverage ratio standards
could make it uneconomical for covered
organizations to hold or provide
unfunded revolving lines of credit with
maturities of less than one year, cash,
U.S. Treasuries, reverse repurchase
agreements, certain traditional interest
rate swaps, and credit default swaps on
corporate bonds. Other commenters
maintained that the 2013 NPR could
incentivize banking organizations to
hold the lowest quality assets possible
within the constraints of the other credit
quality regulations and, thus, would be
fundamentally at odds with the
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agencies’ proposed liquidity coverage
ratio (LCR) by encouraging banking
organizations to divest low-risk assets
above the minimum required by the
proposed LCR.27 In addition, according
to commenters, banking organizations
would find high-volume, low-risk and
low-return, client-driven financial
activities less profitable, such as deposit
taking. As such, commenters stated that
a binding leverage ratio would result in
higher prices, less liquidity, and
reduction of business lines that have
lower returns on assets.
Some commenters recommended that
the agencies use a more tailored
approach to calibrate the proposed
enhanced supplementary leverage ratio
standards, for example by proposing a
leverage buffer for covered BHCs that
would be aligned with the capital
surcharges provided in the BCBS G–SIB
framework. These commenters asserted
that there is significant diversity among
G–SIBs in risk profile, operating
structure, and approaches to balance
sheet management and that a one-sizefits-all approach is unduly punitive for
banking organizations with significant
amounts of highly liquid, low-risk
assets.
In contrast, a few commenters stated
that the supplementary leverage ratio is
a more accurate measure of regulatory
capital than the risk-based capital ratios,
easier to understand, comparable across
firms, less prone to manipulation and,
therefore, should be the binding capital
standard. Commenters supported a
revised calibration as strong, or stronger,
than the one set forth in the 2013 NPR.
For example, some commenters
suggested substantially increasing the
proposed enhanced supplementary
leverage ratio standards for covered
organizations (for example, by
implementing an 8 percent wellcapitalized threshold for any IDI
subsidiary of a covered BHC and a 4 or
5 percent leverage buffer (in addition to
the minimum 3 percent) for covered
BHCs). These commenters argued that
incentivizing covered organizations to
be better capitalized as a group through
the proposed standards would improve
their ability to provide credit during
periods of economic stress. Others
supported either increasing or
maintaining the proposed calibration of
the enhanced supplementary leverage
ratio standards by emphasizing the
importance of constraining the risks
large institutions pose to the financial
system. Other commenters supported
27 On November 29, 2013, the agencies issued a
joint notice of proposed rulemaking that would
implement quantitative liquidity requirements for
certain banking organizations. See 78 FR 71818
(November 29, 2013).
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strengthening the supplementary
leverage ratio standards based on their
view that the risk-based capital
framework is subjective and may
excessively rely on the use of models.
With regard to the concerns raised by
commenters about potential competitive
disadvantages for covered organizations
as a result of the proposed enhanced
supplementary leverage ratio standards,
in the agencies’ experience, a strong
regulatory capital base is a competitive
strength for banking organizations,
rather than a competitive weakness.
Specifically, strong capital promotes
confidence among banking
organizations’ market counterparties
and bolsters the ability of banking
organizations to lend and otherwise
serve customers during stressed market
conditions. The agencies are of the view
that a strongly capitalized banking
system also promotes the resilience of
the broader economy because it
promotes the stability of the financial
system, which allows a wide range of
firms to efficiently access funding and
liquidity to meet their business needs.
The agencies also note that banking
organizations in the U.S. have long been
subject to a leverage ratio framework,
whereas banking organizations in other
jurisdictions generally have not been
subject to any leverage requirement. The
agencies do not believe this
longstanding difference has adversely
affected the competitive strength of U.S.
banking organizations. Finally, the
agencies believe that the benefits to the
banking and financial system from more
resilient systemically important banking
organizations outweigh any potential
competitive disadvantages of related
implementation costs that covered
organizations may face.
With regard to the comments asserting
that the proposed enhanced
supplementary leverage ratio standards
were arbitrary, the 2013 NPR described
the agencies’ approach to calibration.
According to the agencies’ analysis, a 3
percent minimum supplementary
leverage ratio would have been too low
to have meaningfully constrained the
buildup of leverage at the largest
institutions in the years leading up to
the financial crisis. To address this issue
the agencies proposed the enhanced
supplementary leverage ratio standards.
The agencies believe that the leverage
and risk-based capital ratios play
complementary roles, with each
offsetting potential weaknesses of the
other. The 2013 revised capital rule
implemented the capital conservation
buffer framework (which is only
applicable to risk-based capital ratios)
and increased risk-based capital
requirements more than it increased
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leverage requirements, reducing the
ability of the leverage requirements to
act as an effective complement to the
risk-based requirements, as they had
historically. As a result, the degree to
which covered organizations could
potentially benefit from active
management of risk-weighted assets
before they breach the leverage
requirements may be greater. As
described in the 2013 NPR, such
potential behavior suggests that the
increase in stringency of the leverage
and risk-based standards should be
more closely calibrated to each other so
that they remain in an effective
complementary relationship. These
considerations were important in
calibrating the enhanced supplementary
leverage ratio standards. Specifically,
the 2013 NPR noted that the proposed
enhanced supplementary leverage
ratio’s well-capitalized threshold for IDI
subsidiaries of covered BHCs and the
proposed leverage buffer for covered
BHCs would retain a degree of
proportionality with the stronger tier 1
risk-based capital standards (including
the minimum risk-based capital
requirements and the capital
conservation buffer) under the 2013
revised capital rule.
Consistent with the calibration goals
described in the 2013 NPR, the agencies
believe that the proposed enhanced
supplementary leverage ratio standards
should broadly preserve the historical
relationship between the tier 1 leverage
and risk-based capital levels for covered
organizations, rather than
fundamentally alter such a relationship
as several commenters suggest. With
respect to IDI subsidiaries of covered
BHCs, the increase in stringency in
terms of the additional tier 1 capital that
would be required to be well capitalized
under the enhanced supplementary
leverage ratio standards is roughly
equivalent to the increase in stringency
resulting from the application of the
2013 revised capital rule’s risk-based
capital standards.
Moreover, in response to comments
suggesting that the supplementary
leverage ratio well-capitalized threshold
for an IDI subsidiary of a covered BHC
should result in the same amount of
capital needed by a covered BHC to
meet the minimum supplementary ratio
requirement plus the proposed leverage
buffer, the agencies note that the PCA
framework and the proposed leverage
buffer were designed for different
purposes. The PCA framework is
intended to ensure that problems at
depository institutions are addressed
promptly and at the least cost to the
Deposit Insurance Fund. The leverage
buffer (as well as the capital
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conservation buffer) was designed and
calibrated to provide incentives to
banking organizations to hold sufficient
capital to reduce the risk that their
capital levels would fall below their
minimum requirements during times of
economic and financial stress. In
addition, as discussed in the 2013 NPR,
the relationship between the 5 percent
supplementary leverage ratio for
covered BHCs (resulting from the 3
percent minimum supplementary
leverage ratio plus the 2 percent
leverage buffer) and the 6 percent
supplementary leverage ratio’s wellcapitalized threshold for IDI
subsidiaries of covered BHCs is
generally structurally consistent with
the relationship between the 4 percent
minimum leverage ratio for BHCs and
the 5 percent well-capitalized leverage
ratio threshold for IDIs under the
generally applicable regulatory capital
framework, including as revised under
the 2013 revised capital rule.
The agencies note that the
maintenance of a complementary
relationship between the leverage and
risk-based capital ratios is designed to
mitigate any regulatory capital
incentives for covered organizations to
inappropriately increase their risk
profile in response to a binding
supplementary leverage ratio. Similarly,
stress testing provides another
mechanism to counterbalance the risk
that these institutions could potentially
increase their risk profile in response to
a binding supplementary leverage ratio.
If the supplementary leverage ratio is
binding and covered organizations
acquire more higher-risk assets, risk
weights should increase until the riskbased capital framework becomes
binding. Conversely, if a binding riskbased capital ratio induces an
institution to expand portfolios whose
risk is insufficiently addressed by the
risk-based capital framework, its total
leverage exposure would increase until
the leverage ratio becomes binding.
Moreover, the agencies believe that
banking organizations choose their asset
mix based on a variety of factors,
including yields available relative to the
overall cost of funds, the need to
preserve financial flexibility and
liquidity, revenue generation and the
maintenance of market share and
business relationships, and the
likelihood that principal will be repaid.
The agencies also believe that the
enhanced supplementary leverage ratio
standards, together with the strong riskbased regulatory capital framework in
the 2013 revised capital rule, will
increase stability and improve safety
and soundness in the banking system. In
particular, the agencies believe that the
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complementary relationship between
the enhanced supplementary leverage
ratio standards and the risk-based
capital framework under the 2013
revised capital rule will strengthen
capital positions at covered
organizations, thereby reducing the
likelihood that they fail or experience
severe difficulties.
With regard to the comments
suggesting that the calibration of the
enhanced supplementary leverage ratio
should vary in accordance with the
specific systemic footprint of a covered
organization, the agencies note that such
issues are addressed in part by the riskdifferentiation that exists within the
risk-based capital framework. The
agencies believe that all covered
organizations, despite differences in
business models, are systemically
important and highly interconnected
and, therefore, uniformly-applied
leverage capital standards across these
organizations are warranted.
D. Economic Impact of the 2013 NPR on
Specific Types of Securities and Credit
Transactions and on the Custody Bank
Business Model
Commenters also expressed concern
about the effect the 2013 NPR would
have for particular types of transactions
and business models. Commenters
asserted that the 2013 NPR would
directly affect short-term securities
financing transactions, including
repurchase agreements, reverse
repurchase agreements, and revolving
lines of credit, among other similar
transactions, by imposing additional
capital requirements on low-risk
exposures held by covered organizations
when they enter into these
arrangements. Some commenters argued
that the enhanced supplementary
leverage ratio standards may encourage
covered organizations to reduce their
participation in securities financing
transactions. One commenter also
indicated that the 2013 NPR would
result in the entrance into the securities
financing transactions market of
smaller, less-experienced, and less wellcapitalized counterparties who may fall
outside existing regulatory oversight,
resulting in additional systemic risk due
to insufficient oversight of these
counterparties. That commenter argued
that the 2013 NPR may result in the
overexposure to individual
counterparties, because covered
organizations could conclude that
securities financing transactions are
more costly to them and, as a result,
may limit the availability (or the best
terms) of this financing to only those
asset managers to whom they provide
other lines of service. In addition,
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commenters asserted that asset
managers might respond by directing
business to a single large banking
organization in order to receive the best
terms for securities financing
transactions.
Several commenters argued that there
would be less flexibility for mutual fund
managers and insurance companies to
execute certain transactions with
covered organizations as a result of the
enhanced supplementary leverage ratio
standards, which could give rise to less
liquid markets at the time that liquidity
is needed the most. These commenters
indicated that when mutual fund
redemptions rise because individual
investors desire liquidity, investment
managers are required to meet those
redemption requests immediately, and
that if many requests come at once, the
investment manager will use securities
financing arrangements to smooth out
the flow of capital, rather than be forced
to sell investments in a rapid or
disorderly fashion. Commenters also
noted that if securities financing
arrangements are less accessible, an
investment manager may incur higher
costs related to the forced sale of
underlying securities.
Some commenters suggested that the
agencies recalibrate the enhanced
supplementary leverage ratio standards
to better reflect the business model and
risk profile of custody banks, either
through an approach tied to each
covered company’s G–SIB risk-based
capital surcharge (which incorporates
various measures to identify systemic
risk) or an adjustment specific to these
organizations, because a one-size-fits-all
approach would be unduly punitive for
covered organizations with significant
amounts of highly liquid, low-risk
assets. One commenter asserted that
custody banks have balance sheets that
are uniquely constructed as they are
built around client deposits derived
from the provision of core safekeeping
and fund administration services,
whereas most other covered
organizations feature extensive
commercial and investment banking
operations. Some commenters asserted
that the enhanced supplementary
leverage ratio standards would
significantly punish or effectively limit
important custody bank functions such
as those which are associated with
central bank deposits and committed
facilities. These commenters also noted
that the enhanced supplementary
leverage ratio standards may limit the
ability of custody banks to accept
deposits, particularly during periods of
systemic stress. One commenter
asserted that global payment systems
could be adversely affected by a
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reduction in central bank balances,
which are broadly used by banking
organizations to reduce the risk of
payment failures and facilitate
consistent and smooth payment flows.
In addition, some commenters asserted
that the enhanced supplementary
leverage ratio standards would reduce
incentives to hold low-risk assets and
would increase the cost to comply with
increased margin requirements,
particularly initial margin, for
derivatives transactions. The agencies
note that several of the commenters’
concerns were related to aspects of the
BCBS consultative paper.
With regard to the comments
expressing concern about the impact of
the enhanced supplementary leverage
ratio standards on securities financing
transactions, the agencies believe that
certain provisions of the 2014 NPR
would address several of these
concerns. In addition, the agencies
believe it is important to consider that
counterparties may view favorably a
banking organization’s maintenance of a
meaningfully higher supplementary
leverage ratio. To the extent this occurs,
there might be some reduction in a
banking organization’s cost of funds that
potentially offsets any costs related to
holding more regulatory capital. In this
regard, the agencies also note that any
change in regulatory capital costs would
affect a banking organization’s overall
cost of funds only to the extent it affects
the weighted average cost of its
deposits, debt, and equity.
The agencies believe that using daily
average balance sheet assets, rather than
requiring the average of three end-ofmonth balances in the calculation of the
supplementary leverage ratio under the
2013 revised capital rule would be an
appropriate way to address the
commenters’ concerns on the impact of
spikes in deposits and, in the 2014 NPR,
are proposing changes to the calculation
of total leverage exposure that would
incorporate this concept.
Likewise, for purposes of determining
total leverage exposure, the 2014 NPR
would permit cash variation margin that
satisfies certain requirements to reduce
the positive mark-to-fair value of
derivative contracts. The agencies
believe this proposed revision in the
2014 NPR would address the
commenters’ concerns regarding the
potential increase in the cost to comply
with increased margin requirements.
E. Measure of Capital Used as the
Numerator of the Supplementary
Leverage Ratio
The agencies sought comment on the
appropriate measure of capital for the
numerator of the supplementary
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leverage ratio. Many commenters
supported tier 1 capital as the
appropriate measure of capital for the
numerator of the supplementary
leverage ratio because it is designed
specifically to absorb losses on a going
concern basis and has been
meaningfully strengthened under the
2013 revised capital rule.
One commenter encouraged the
agencies to allow covered banking
organizations to include the amount of
a covered organization’s allowance for
loan and lease losses (ALLL) because it
is available to absorb losses. A few
commenters, however, asserted that the
numerator of the supplementary
leverage ratio should be common equity
tier 1 (CET1) capital. One commenter
supported this assertion with the
observation that CET1 capital is the
standard most likely to keep an
institution solvent and able to lend
during periods of market distress, and
suggested it would be the only measure
of capital strength trusted by the
markets during a financial crisis.
Another commenter asserted that a
tangible equity measure is preferable
because it is the most simple,
transparent, and useful measure of lossabsorbing capital.
One commenter recognized the
importance of having a single definition
of tier 1 capital for both risk-based and
leverage requirements, but urged the
agencies to revisit the treatment of
unrealized gains and losses included in
accumulated other comprehensive
income (AOCI) for large banking
organizations under the 2013 revised
capital rule.
The agencies have considered the
comments and have decided to retain
tier 1 capital as the numerator of the
supplementary leverage ratio. The
agencies agree that CET1 capital is the
most conservative measure of capital
defined in the 2013 revised capital rule
and has the highest capacity to absorb
losses, similar to most common
descriptions of ‘‘tangible common
equity.’’ However, as a practical matter
for U.S. banking organizations, tier 1
capital consists of CET1 capital plus
non-cumulative perpetual preferred
stock, a form of preferred stock that the
agencies believe has strong lossabsorbing capacity. Accordingly, the
agencies believe that tier 1 capital, as
defined in the 2013 revised capital rule,
is an appropriately conservative
measure of capital for the purposes of
the supplementary leverage ratio.
Furthermore, tier 1 capital incorporates
substantial regulatory adjustments and
deductions that are not typically made
from market measures of tangible
equity. Moreover, using tier 1 capital as
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the numerator of the supplementary
leverage ratio has the advantage of
maintaining consistency with the
numerator of the leverage ratio that has
long applied broadly to U.S. banking
organizations and that now applies to
banking organizations in other
jurisdictions adopting the Basel III
leverage ratio.
With respect to allowing covered
banking organizations to include ALLL
as part of the capital measure for the
numerator, the agencies note that ALLL
is partially includable in tier 2 capital
under the risk-based capital framework
and under the 2013 revised capital rule.
However, ALLL is not includable in tier
1 capital and the agencies believe that
such an inclusion would weaken the
quality of tier 1 capital as it relates to
the supplementary leverage ratio when
compared to the risk-based capital
framework.
The agencies considered comments
on the recognition of unrealized gains
and losses in AOCI in connection with
the development of the 2013 revised
capital rule, which requires advanced
approaches banking organizations to
recognize unrealized gains and losses in
AOCI for purposes of determining CET1
capital.28 The agencies believe that
requiring a banking organization to
reflect unrealized gains and losses in
regulatory capital provides a more
accurate depiction of its loss-absorption
capacity at a specific point in time,
which is particularly important for
large, internationally active banking
organizations. For this reason and the
reasons discussed above, the agencies
are retaining tier 1 capital as the
numerator of the enhanced
supplementary leverage ratio standards
under this final rule.29
F. Total Leverage Exposure Definition
The 2013 NPR would not have
amended the definition of total leverage
exposure (the denominator of the
supplementary leverage ratio) under the
2013 revised capital rule. However, a
significant number of commenters
criticized the components and
methodology for calculating total
leverage exposure.
28 Banking organizations that are not subject to
the advanced approaches rule may elect to opt out
of the requirement to recognize unrealized gains
and losses in AOCI for purposes of determining
CET1 capital.
29 See section III.C. of the preamble in the 2013
final capital rule issued by the Board and OCC for
a discussion of accumulated other comprehensive
income. 78 FR 62018, 62026–62027 (October 11,
2013). See section V.B.2.c. of the preamble in the
2013 interim final capital rule issued by the FDIC
for a discussion of accumulated other
comprehensive income. 78 FR 55340, 55377–55380
(September 10, 2013).
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Many commenters asserted that total
leverage exposure should be more risksensitive. For instance, commenters
encouraged the agencies to exclude
highly liquid assets, such as cash on
hand and claims on central banks, and
sovereign securities, particularly U.S.
Treasuries, from total leverage exposure.
Commenters maintained that, if the
agencies opt to not exclude risk-free or
very low-risk, highly liquid assets from
total leverage exposure, then these
assets should be discounted according
to their relative levels of liquidity
similar to the categories of eligible
assets under the standardized approach
in the 2013 revised capital rule. In
addition, commenters stated that bank
deposits with central banks such as the
Federal Reserve Banks should be
excluded in order to accommodate
increases in banks’ assets, both
temporary and sustained, that occur as
a result of macroeconomic factors and
monetary policy decisions, particularly
during periods of financial market
stress. Commenters urged the agencies
to exclude assets such as U.S.
government obligations securing public
sector entity (PSE) deposits from total
leverage exposure. Commenters argued
that a banking organization holding PSE
deposits is required to pledge U.S.
Treasuries to collateralize the deposits,
and that if U.S. Treasuries are not
excluded from total leverage exposure,
the cost of additional capital would
result in higher costs being passed on to
the PSEs. Another commenter, however,
asked that the agencies not introduce
any risk-based capital measure into the
supplementary leverage ratio.30
Several commenters encouraged the
agencies not to include in total leverage
exposure the notional amount of all offbalance sheet assets, particularly for
undrawn commitments. Commenters
stated that using the notional value is
inaccurate, particularly for trade finance
and committed credit lines.
Commenters encouraged the agencies to
use the more granular standardized
approach credit conversion factors
(CCF) in the 2013 revised capital rule.
With respect to the commenters’
request for more risk-sensitivity in the
supplementary leverage ratio
calculation, the agencies believe that
excluding categories of assets from the
denominator of the supplementary
leverage ratio is generally inconsistent
with the intended role of this ratio as an
overall limitation on leverage that does
not differentiate across asset types.
30 One commenter also noted that retaining the
proposal to include U.S. Treasury debt securities in
total leverage exposure could present certain
national security concerns.
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Accordingly, the agencies have decided
not to exempt any categories of balance
sheet assets from the denominator of the
supplementary leverage ratio in the final
rule. Thus, for example, cash, U.S.
Treasuries, and deposits at the Federal
Reserve are included in the
denominator of the supplementary
leverage ratio, as has been the case in
the agencies’ generally applicable
leverage ratio. The agencies recognize
the low risk of these assets under the
agencies’ risk-based capital rules, which
complement the minimum
supplementary leverage ratio
requirement and the enhanced
supplementary leverage ratio standards,
as discussed above. Excluding specific
categories of assets from the
supplementary leverage ratio
denominator would in effect allow
banking organizations to finance these
assets exclusively with debt, potentially
resulting in a significant increase in a
banking organizations’ ability to deploy
financial leverage.
With regard to the comments
criticizing the use of the notional
amounts of off-balance sheet
commitments for purposes of the
supplementary leverage ratio, the
agencies are seeking comment on
proposed changes to the denominator in
the 2014 NPR that would include the
use of standardized approach CCFs for
most off-balance sheet commitments.
G. Proposed Basel III Leverage Ratio
Revisions
A number of commenters were
concerned about the relationship
between the enhanced supplementary
leverage ratio standards and the
revisions to the Basel III leverage ratio
framework proposed by the BCBS
consultative paper, which proposed a
leverage ratio exposure measure that
would result in greater reported
exposure than the total leverage
exposure as defined in the 2013 revised
capital rule.
A number of commenters were
concerned that covered organizations
would be placed at a competitive
disadvantage relative to foreign
competitors if the enhanced
supplementary leverage ratio standards
in the U.S. are set at a higher level than
the Basel III leverage ratio. Some
commenters also expressed concern that
the proposed BCBS revisions to the
denominator would be inappropriately
restrictive and might be incorporated
into the U.S. supplementary leverage
ratio. However, another commenter
argued that a stronger leverage ratio
standard would enhance the
competitive position of U.S. banking
organizations by improving the relative
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stability and financial strength of the
U.S. banking system.
One commenter included a study of
the impact of the revisions proposed in
the BCBS’s consultative paper, and,
where relevant, the U.S. enhanced
supplementary leverage ratio standards,
on the U.S. banking industry, products
offered by U.S. banks, and U.S. markets.
The study concludes that, on average,
U.S. advanced approaches banking
organizations (including U.S. G-SIBs)
exceed the 3 percent supplementary
leverage ratio threshold based both on
the ratio as formulated in the Basel III
leverage ratio framework and after
giving effect to the BCBS proposed
revisions, but when measured against
the proposed enhanced supplementary
leverage ratio standards, U.S. advanced
approaches banking organizations
would have substantial tier 1 capital
shortfalls. Specifically, the study
suggests that if the revisions proposed
in the consultative paper and the
proposed enhanced supplementary
leverage ratio standards were both
implemented, the U.S. advanced
approaches banking organizations
would need $202 billion in additional
tier 1 capital or a reduction in exposures
of $3.7 trillion to meet those standards,
and to meet the proposed enhanced
supplementary leverage ratio standards
without giving effect to the BCBS
consultative paper changes, these
banking organizations would need to
raise $69 billion in additional capital or
reduce exposures by $1.2 trillion. The
study suggests that if the agencies
adopted the Basel proposed total
leverage exposure as contemplated in
the consultative paper in combination
with the proposed enhanced
supplementary leverage ratio standards,
the leverage ratio would become the
binding constraint for banking
organizations holding 67 percent of U.S.
G–SIB assets.
One commenter, on the other hand,
encouraged the agencies to revise the
denominator of the supplementary
leverage ratio in accordance with the
BCBS’s consultative paper. This
commenter further encouraged the
agencies to restrict derivatives netting
permitted under the BCBS consultative
paper and to substantially increase the
standardized measurement of the
potential future exposure for derivative
transactions. Similarly, another
commenter asked the agencies to
consider the use of International
Financial Reporting Standards (IFRS)
for purposes of measuring off-balance
sheet derivatives exposures.
Neither the 2013 NPR nor the final
rule includes the changes to total
leverage exposure described in the
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BCBS consultative paper. Therefore, the
agencies’ supplementary leverage ratio
is consistent with the international
leverage ratio established by the BCBS
in 2010. The agencies’ analysis of the
impact of this final rule is summarized
in the next section of this preamble.
As discussed above, in January 2014
the BCBS adopted certain aspects of the
proposals outlined in the BCBS
consultative paper as well as other
changes to the denominator. The
changes to the denominator included,
among other items, revising CCFs for
certain off-balance sheet exposures,
incorporating the notional amount of
sold credit protection (that is, credit
derivatives sold by a banking
organization acting as a credit
protection provider) in total leverage
exposure, and modifying the measure of
exposure for derivatives and repo-style
transactions, including changes to the
criteria for recognizing netting for repostyle transactions and cash collateral for
derivatives. The agencies believe that
the changes introduced by the BCBS
strengthen the Basel III leverage ratio in
important ways. In the 2014 NPR,
published elsewhere in today’s Federal
Register, the agencies are proposing
revisions to the supplementary leverage
ratio that are generally consistent with
the BCBS 2014 revisions. The agencies
believe that the proposed revisions to
the definition of total leverage exposure
published in the 2014 NPR are
responsive to a number of concerns that
commenters expressed about the
relationship between the BCBS process
and the supplementary leverage ratio. In
this regard, the agencies will carefully
review all comments received on these
aspects of the definition of total leverage
exposure in the 2014 NPR.
H. Impact Analysis
Commenters suggested that, in
addition to waiting for the BCBS to
finalize the denominator of the Basel
leverage ratio, the agencies should
conduct a quantitative impact study to
assess the cumulative impact of bank
capital and other financial reform
regulations on the ability of U.S.
banking organizations to provide
financial services to consumers and
businesses.
In the 2013 NPR, the agencies cited
data from the Board’s Comprehensive
Capital Analysis and Review (CCAR)
process in which all of the agencies
participate. This information reflects
banking organizations’ own projections
of their supplementary leverage ratios
under the supervisory baseline scenario,
including institutions’ own assumptions
about earnings retention and other
strategic actions.
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As noted in the 2013 NPR, in the 2013
CCAR, all 8 covered BHCs met the 3
percent supplementary leverage ratio as
of third quarter 2012, and almost all
projected that their supplementary
leverage ratios would exceed 5 percent
at year-end 2017. If the enhanced
supplementary leverage ratio standards
had been in effect as of third quarter
2012, covered BHCs under the 2013
NPR that did not exceed a minimum
supplementary leverage ratio
requirement of 3 percent plus a 2
percent leverage buffer would have
needed to increase their tier 1 capital by
about $63 billion to meet that ratio.
Because CCAR is focused on the
consolidated capital of BHCs, BHCs did
not project future Basel III leverage
ratios for their IDIs. To estimate the
impact of the 2013 NPR on the lead
subsidiary IDIs of covered BHCs, the
agencies assumed that an IDI has the
same ratio of total leverage exposure to
total assets as its BHC. Using this
assumption and CCAR 2013 projections,
all 8 lead subsidiary IDIs of covered
BHCs were estimated to meet the 3
percent supplementary leverage ratio as
of third quarter 2012. If the enhanced
supplementary leverage ratio standards
had been in effect as of third quarter
2012, the lead subsidiary IDIs of covered
BHCs that did not meet a 6 percent
supplementary leverage ratio would
have needed to increase their tier 1
capital by about $89 billion to meet that
ratio.
In finalizing the rule, the agencies
updated their supervisory estimates of
the amount of tier 1 capital that would
be required for covered BHCs and their
lead subsidiary IDIs to meet the
enhanced supplementary leverage ratio
standards. Using updated CCAR
estimates, all 8 covered BHCs meet the
3 percent supplementary leverage ratio
as of fourth quarter 2013. If the
enhanced supplementary leverage ratio
standards had been in effect as of fourth
quarter 2013, CCAR data suggests that
covered BHCs that would not have met
a 5 percent supplementary leverage ratio
would have needed to increase their tier
1 capital by about $22 billion to meet
that ratio.
Assuming that an IDI has the same
ratio of total leverage exposure to total
assets as its BHC to estimate the impact
at the IDI level, the updated CCAR data
indicates that all 8 lead subsidiary IDIs
of covered BHCs meet the 3 percent
supplementary leverage ratio as of
fourth quarter 2013. If the enhanced
supplementary leverage ratio standards
had been in effect as of fourth quarter
2013, the updated CCAR data suggests
that the lead subsidiary IDIs of covered
BHCs that did not meet a 6 percent ratio
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24537
would have needed to increase their tier
1 capital by about $38 billion to meet
that ratio. The agencies believe that the
affected covered BHCs and their
subsidiary IDIs would be able to
effectively manage their capital
structures to meet the enhanced
supplementary leverage ratio standards
in the final rule by January 1, 2018. The
agencies believe that this transition
period should help to reduce any shortterm consequences and allow covered
organizations to adjust smoothly to the
new supplementary leverage ratio
standards.
I. Advanced Approaches Framework
The agencies sought comment on
whether in light of the proposed
enhanced supplementary leverage ratio
standards and ongoing standardized
risk-based capital floors, the agencies
should consider, in some future
regulatory action, simplifying or
eliminating portions of the advanced
approaches rule if they are unnecessary
or duplicative. One commenter stated
that mandatory application of the
advanced approaches rule is based on
an outdated size-based threshold, and
that the agencies should review the
thresholds for mandatory application of
the advanced approaches risk-based
capital rules and consider whether, in
light of recently implemented reforms to
the regulatory capital framework, the
criteria remain appropriate or whether
they should be refined given the
purpose of those rules. Another
commenter recommended delaying
consideration of the proposed enhanced
supplementary leverage ratio standards
pending the review and completion of
regulatory initiatives based on the
BCBS’s discussion paper entitled, The
regulatory framework: balancing risk
sensitivity, simplicity and
comparability.31
The agencies are not proposing any
changes to the advanced approaches
rule in connection with the final rule.
As with any aspect of the regulatory
capital framework, the agencies will
continue to evaluate the appropriateness
of the requirements of the advanced
approaches rule in light of this final rule
and the ongoing evolution of the U.S.
financial regulatory framework.
III. Description of the Final Rule
For the reasons discussed above, and
consistent with the transition provisions
set forth in subpart G of the 2013
revised capital rule, the agencies have
decided to adopt the 2 percent leverage
buffer for covered BHCs and the 6
31 Available at https://www.bis.org/publ/
bcbs258.pdf.
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percent well-capitalized threshold for
subsidiary IDIs of covered BHCs
effective on January 1, 2018. The final
rule implements the provisions in the
2013 NPR as proposed. Accordingly, the
final rule applies to any U.S. top-tier
BHC with more than $700 billion in
total consolidated assets or more than
$10 trillion in assets under custody and
any advanced approaches IDI subsidiary
of such BHCs.
As further discussed above, the
agencies are proposing elsewhere in the
Federal Register changes to the
calculation of the supplementary
leverage ratio that would amend the
2013 revised capital rule and change the
basis for calculating the supplementary
leverage ratio.
Under the final rule, a covered BHC
that maintains a leverage buffer greater
than 2 percent of its total leverage
exposure is not subject to the rule’s
limitations on its distributions and
discretionary bonus payments.32 If the
covered BHC maintains a leverage buffer
of 2 percent or less, it is subject to
increasingly stricter limitations on such
payouts. An IDI that is a subsidiary of
a covered BHC is required to satisfy a
6 percent supplementary leverage ratio
to be considered well capitalized for
PCA purposes. The leverage ratio PCA
thresholds under the 2013 revised
capital rule and this final rule are
shown in Table 1.
TABLE 1—LEVERAGE RATIO PCA LEVELS
PCA category
Generally applicable leverage ratio
(percent)
Supplementary
leverage ratio
for advanced
approaches banking
organizations
(percent)
Well Capitalized ......................
Adequately Capitalized ...........
Undercapitalized ......................
Significantly Undercapitalized
Critically Undercapitalized .......
≥5 ............................................................................................
≥4 ............................................................................................
<4 ............................................................................................
<3 ............................................................................................
Tangible equity (defined as tier 1 capital plus non-tier 1 perpetual preferred stock) to Total Assets ≤2.
Not applicable ........................
≥3 ...........................................
<3 ...........................................
Not applicable ........................
Not applicable ........................
Supplementary
leverage ratio
for subsidiary
IDIs of covered
BHCs
(percent)
≥6.
≥3.
<3.
Not applicable.
Not applicable.
Note: The supplementary leverage ratio includes many off-balance sheet exposures in its denominator; the generally applicable leverage ratio
does not.
B. Regulatory Flexibility Act Analysis
or less) or to certify that the rule will not
have a significant economic impact on
a substantial number of small entities.
Using the SBA’s size standards, as of
December 31, 2013, the OCC supervised
1,195 small entities.33
As described in the SUPPLEMENTARY
INFORMATION section of the preamble, the
final rule strengthens the supplementary
leverage ratio standards for covered
BHCs and their IDI subsidiaries.
Because the final rule applies only to
covered BHCs and their IDI subsidiaries,
it does not impact any OCC-supervised
small entities. Therefore, the OCC
certifies that the final rule will not have
a significant economic impact on a
substantial number of OCC-supervised
small entities.
OCC
Board
The Regulatory Flexibility Act, 5
U.S.C. 601 et seq. (RFA) requires an
agency, in connection with a final rule,
to prepare a Final Regulatory Flexibility
Act analysis describing the impact of
the rule on small entities (defined by the
Small Business Administration for
purposes of the RFA to include banking
entities with total assets of $500 million
The Regulatory Flexibility Act, 5
U.S.C. 601 et seq. (RFA) requires an
agency to provide a final regulatory
flexibility analysis with a final rule or
to certify that the rule will not have a
significant economic impact on a
substantial number of small entities
(defined for purposes of the RFA
beginning on July 22, 2013, to include
banks with assets less than or equal to
$500 million) 34 and publish its analysis
or a summary, or its certification and a
short, explanatory statement, in the
Federal Register along with the final
rule.
The Board is providing a final
regulatory flexibility analysis with
respect to this final rule. As discussed
above, this final rule is designed to
enhance the safety and soundness of
U.S. top-tier bank holding companies
with at least $700 billion in
consolidated assets or at least $10
trillion in assets under custody (covered
BHCs), and the insured depository
institution subsidiaries of covered
BHCs. The Board received no public
comments on the proposed rule from
members of the general public or from
the Chief Counsel for Advocacy of the
Small Business Administration. Thus,
no issues were raised in public
comments relating to the Board’s initial
regulatory flexibility act analysis and no
changes are being made in response to
such comments.
Under regulations issued by the Small
Business Administration, a small entity
includes a depository institution or
32 See section 11(a)(4) of the 2013 revised capital
rule.
33 The OCC calculated the number of small
entities using the SBA’s size thresholds for
commercial banks and savings institutions, and
trust companies, which are $500 million and $35.5
million, respectively. 78 FR 37409 (June 20, 2013).
Consistent with the General Principles of Affiliation
13 CFR 121.103(a), the OCC counted the assets of
affiliated financial institutions when determining
whether to classify a national bank or Federal
savings association as a small entity. The OCC used
December 31, 2013, to determine size because a
‘‘financial institution’s assets are determined by
averaging the assets reported on its four quarterly
financial statements for the preceding year.’’ See
footnote 8 of the U.S. Small Business
Administration’s Table of Size Standards.
34 See 13 CFR 121.201. Effective July 22, 2013, the
Small Business Administration revised the size
standards for banking organizations to $500 million
in assets from $175 million in assets. 78 FR 37409
(June 20, 2013).
All advanced approaches banking
organizations must calculate and begin
reporting their supplementary leverage
ratios beginning in the first quarter of
2015. However, the enhanced
supplementary leverage ratio standards
for covered organizations set forth in the
final rule do not become effective until
January 1, 2018.
IV. Regulatory Analysis
A. Paperwork Reduction Act (PRA)
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There is no new collection of
information pursuant to the PRA (44
U.S.C. 3501 et seq.) contained in this
final rule. The agencies did not receive
any comment on their PRA analysis.
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subject to the Unfunded Mandates Act
must prepare a budgetary impact
statement before promulgating a rule
that includes a Federal mandate that
may result in expenditure by State,
local, and tribal governments, in the
aggregate, or by the private sector, of
$100 million (adjusted for inflation) or
more in any one year. The current
inflation-adjusted expenditure threshold
is $141 million. If a budgetary impact
statement is required, section 205 of the
UMRA also requires an agency to
identify and consider a reasonable
number of regulatory alternatives before
promulgating a rule. The OCC has
determined this proposed rule is likely
to result in the expenditure by the
private sector of $141 million or more.
The OCC has prepared a budgetary
impact analysis and identified and
considered alternative approaches.
When the final rule is published in the
Federal Register, the full text of the
OCC’s analyses will available at:
https://www.regulations.gov, Docket ID
OCC–2013–0008.
FDIC
The RFA requires an agency to
provide an FRFA with a final rule or to
certify that the rule will not have a
significant economic impact on a
substantial number of small entities
(defined for purposes of the RFA to
include banking entities with total
assets of $500 million or less).35
As described in sections I and III of
this preamble, the final rule strengthens
the supplementary leverage ratio
standards for covered BHCs and their
advanced approaches IDI subsidiaries.
As of December 31, 2013, 1 (out of
3,394) small state nonmember bank and
no (out of 303) small state savings
associations were advanced approaches
IDI subsidiaries of a covered BHC.
Therefore, the FDIC does not believe
that the final rule will result in a
significant economic impact on a
substantial number of small entities
under its supervisory jurisdiction.
The FDIC certifies that the final rule
does not have a significant economic
impact on a substantial number of small
FDIC-supervised institutions.
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bank holding company with total assets
of $500 million or less (a small banking
organization). As of December 31, 2013,
there were 627 small state member
banks. As of December 31, 2013, there
were approximately 3,676 small bank
holding companies. No small top-tier
bank holding company would meet the
threshold provided in the final rule, so
there would be no additional projected
compliance requirements imposed on
small bank holding companies. One
covered bank holding company has one
small state member bank subsidiary,
which would be covered by the final
rule. The Board expects that any small
banking organization covered by the
final rule would rely on its parent
banking organization for compliance
and would not bear additional costs.
The Board believes that the final rule
will not have a significant economic
impact on small banking organizations
supervised by the Board and therefore
believes that there are no significant
alternatives to the final rule that would
reduce the economic impact on small
banking organizations supervised by the
Board.
D. Plain Language
C. OCC Unfunded Mandates Reform Act
of 1995 Determination
Section 202 of the Unfunded
Mandates Reform Act of 1995, Public
Law 104–4 (Unfunded Mandates Reform
Act) provides that an agency that is
35 Effective July 22, 2013, the SBA revised the size
standards for banking organizations to $500 million
in assets from $175 million in assets. 78 FR 37409
(June 20, 2013).
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Section 722 of the Gramm-LeachBliley Act requires the Federal banking
agencies to use plain language in all
proposed and final rules published after
January 1, 2000. The agencies have
sought to present the final rule in a
simple and straightforward manner. The
agencies did not receive any comment
on their use of plain language.
List of Subjects
12 CFR Part 6
National banks.
12 CFR Part 208
Confidential business information,
Crime, Currency, Federal Reserve
System, Mortgages, Reporting and
recordkeeping requirements, Securities.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the
preamble and under the authority of 12
U.S.C. 93a, 1831o, and 5412(b)(2)(B), the
Office of the Comptroller of the
Currency amends part 6 of chapter I of
title 12, Code of Federal Regulations as
follows:
PART 6—PROMPT CORRECTIVE
ACTION
1. The authority citation for part 6
continues to read as follows:
■
Authority: 12 U.S.C. 93a, 1831o,
5412(b)(2)(B).
2. Amend § 6.4 by revising paragraph
(c)(1)(iv) to read as follows:
■
§ 6.4 Capital measures and capital
category definition.
*
*
*
*
*
(c) * * *
(1) * * *
(iv) Leverage Measure:
(A) The national bank or Federal
savings association has a leverage ratio
of 5.0 percent or greater; and
(B) With respect to a national bank or
Federal savings association that is a
subsidiary of a U.S. top-tier bank
holding company that has more than
$700 billion in total assets as reported
on the company’s most recent
Consolidated Financial Statement for
Bank Holding Companies (FR Y–9C) or
more than $10 trillion in assets under
custody as reported on the company’s
most recent Banking Organization
Systemic Risk Report (Y–15), on January
1, 2018 and thereafter, the national bank
or Federal savings association has a
supplementary leverage ratio of 6.0
percent or greater; and
*
*
*
*
*
Board of Governors of the Federal
Reserve System
12 CFR Part 217
Administrative practice and
procedure, Banks, Banking, Capital,
Federal Reserve System, Holding
companies, Reporting and
recordkeeping requirements, Securities.
12 CFR Part 324
Administrative practice and
procedure, Banks, banking, Capital
Adequacy, Reporting and recordkeeping
requirements, Savings associations,
State non-member banks.
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12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the
preamble, chapter II of title 12 of the
Code of Federal Regulations is amended
as follows:
PART 208—MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
(REGULATION H)
3. The authority citation for part 208
is revised to read as follows:
■
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Authority: 12 U.S.C. 24, 36, 92a, 93a,
248(a), 248(c), 321–338a, 371d, 461, 481–486,
601, 611, 1814, 1816, 1818, 1820(d)(9),
1833(j), 1828(o), 1831, 1831o, 1831p–1,
1831r–1, 1831w, 1831x, 1835a, 1882, 2901–
2907, 3105, 3310, 3331–3351, 3905–3909,
and 5371; 15 U.S.C. 78b, 78I(b), 78l(i), 780–
4(c)(5), 78q, 78q–1, and 78w, 1681s, 1681w,
6801, and 6805; 31 U.S.C. 5318; 42 U.S.C.
4012a, 4104a, 4104b, 4106 and 4128.
§ 217.1 Purpose, applicability,
reservations of authority, and timing.
§ 208.41 Definitions for purposes of this
subpart.
*
*
*
*
(f) * * *
(4) Beginning January 1, 2018, a
covered BHC (as defined in § 217.2) is
subject to limitations on distributions
and discretionary bonus payments in
accordance with the lower of the
maximum payout amount as determined
under § 217.11(a)(2)(iii) and the
maximum leverage payout amount as
determined under § 217.11(a)(2)(vi).
■ 8. In § 217.2 add a definition of
‘‘covered BHC’’ in alphabetical order to
read as follows:
*
§ 217.2
4. In § 208.41, redesignate paragraphs
(c) through (j) as paragraphs (d) through
(k), and add a new paragraph (c) to read
as follows:
■
*
*
*
*
(c) Covered BHC means a covered
BHC as defined in § 217.2 of Regulation
Q (12 CFR 217.2).
*
*
*
*
*
■ 5. Amend § 208.43 as follows:
■ a. Add paragraph (a)(2)(iv)(C).
■ b. Revise paragraph (c)(1)(iv).
§ 208.43 Capital measures and capital
category definitions.
(a) * * *
(2) * * *
(iv) * * *
(C) With respect to any bank that is a
subsidiary (as defined in § 217.2 of
Regulation Q (12 CFR 217.2)) of a
covered BHC, on January 1, 2018, and
thereafter, the supplementary leverage
ratio.
*
*
*
*
*
(c) * * *
(1) * * *
(iv) Leverage Measure:
(A) The bank has a leverage ratio of
5.0 percent or greater; and
(B) Beginning on January 1, 2018,
with respect to any bank that is a
subsidiary of a covered BHC under the
definition of ‘‘subsidiary’’ in section
217.2 of Regulation Q (12 CFR 217.2),
the bank has a supplementary leverage
ratio of 6.0 percent or greater; and
*
*
*
*
*
PART 217—CAPITAL ADEQUACY OF
BOARD-REGULATED INSTITUTIONS
6. The authority citation for part 217
is revised to read as follows:
■
Authority: 12 U.S.C. 248(a), 321–338a,
481–486, 1462a, 1467a, 1818, 1828, 1831n,
1831o, 1831p–l, 1831w, 1835, 1844(b), 1851,
3904, 3906–3909, 4808, 5365, 5368, 5371.
7. Amend § 217.1 by revising
paragraph (f)(4) to read as follows:
tkelley on DSK3SPTVN1PROD with RULES
■
VerDate Mar<15>2010
16:24 Apr 30, 2014
Jkt 232001
*
Definitions.
*
*
*
*
*
Covered BHC means a U.S. top-tier
bank holding company that has more
than $700 billion in total assets as
reported on the company’s most recent
Consolidated Financial Statements for
Holding Companies (FR Y–9C) or more
than $10 trillion in assets under custody
as reported on the company’s most
recent Banking Organization Systemic
Risk Report (FR Y–15).
*
*
*
*
*
■ 9. In § 217.11
■ A. Add new paragraphs (a)(2)(v) and
(a)(2)(vi), and (c);
■ B. Revise paragraph (a)(4); and
■ C. Add Table 2 to read as follows.
§ 217.11 Capital conservation buffer and
countercyclical capital buffer amount.
(a) * * *
(2) * * *
(v) Maximum leverage payout ratio.
The maximum leverage payout ratio is
the percentage of eligible retained
income that a covered BHC can pay out
in the form of distributions and
discretionary bonus payments during
the current calendar quarter. The
maximum leverage payout ratio is based
on the covered BHC’s leverage buffer,
calculated as of the last day of the
previous calendar quarter, as set forth in
Table 2 of this section.
(vi) Maximum leverage payout
amount. A covered BHC’s maximum
leverage payout amount for the current
calendar quarter is equal to the covered
BHC’s eligible retained income,
multiplied by the applicable maximum
leverage payout ratio, as set forth in
Table 2 of this section.
*
*
*
*
*
(4) Limits on distributions and
discretionary bonus payments. (i) A
PO 00000
Frm 00014
Fmt 4700
Sfmt 4700
Board-regulated institution shall not
make distributions or discretionary
bonus payments or create an obligation
to make such distributions or payments
during the current calendar quarter that,
in the aggregate, exceed the maximum
payout amount or, as applicable, the
maximum leverage payout amount.
(ii) A Board-regulated institution that
has a capital conservation buffer that is
greater than 2.5 percent plus 100
percent of its applicable countercyclical
capital buffer, in accordance with
paragraph (b) of this section, and, if
applicable, that has a leverage buffer
that is greater than 2.0 percent, in
accordance with paragraph (c) of this
section, is not subject to a maximum
payout amount or maximum leverage
payout amount under this section.
(iii) Negative eligible retained income.
Except as provided in paragraph
(a)(4)(iv) of this section, a Boardregulated institution may not make
distributions or discretionary bonus
payments during the current calendar
quarter if the Board-regulated
institution’s:
(A) Eligible retained income is
negative; and
(B) Capital conservation buffer was
less than 2.5 percent, or, if applicable,
leverage buffer was less than 2.0
percent, as of the end of the previous
calendar quarter.
*
*
*
*
*
(c) Leverage buffer—(1) General. A
covered BHC is subject to the lower of
the maximum payout amount as
determined under paragraph (a)(2)(iii) of
this section and the maximum leverage
payout amount as determined under
paragraph (a)(2)(vi) of this section.
(2) Composition of the leverage buffer.
The leverage buffer is composed solely
of tier 1 capital.
(3) Calculation of the leverage buffer.
(i) A covered BHC’s leverage buffer is
equal to the covered BHC’s
supplementary leverage ratio minus 3
percent, calculated as of the last day of
the previous calendar quarter based on
the covered BHC’s most recent
Consolidated Financial Statement for
Bank Holding Companies (FR Y–9C).
(ii) Notwithstanding paragraph
(c)(3)(i) of this section, if the covered
BHC’s supplementary leverage ratio is
less than or equal to 3 percent, the
covered BHC’s leverage buffer is zero.
E:\FR\FM\01MYR1.SGM
01MYR1
Federal Register / Vol. 79, No. 84 / Thursday, May 1, 2014 / Rules and Regulations
24541
TABLE 2 TO § 217.11—CALCULATION OF MAXIMUM LEVERAGE PAYOUT AMOUNT
Maximum leverage
payout ratio
(as a percentage of
eligible retained
income)
Leverage buffer
Greater than 2.0 percent .........................................................................................................................................................
Less
Less
Less
Less
than
than
than
than
or
or
or
or
equal
equal
equal
equal
to
to
to
to
2.0
1.5
1.0
0.5
percent, and greater than 1.5 percent ...........................................................................................
percent, and greater than 1.0 percent ...........................................................................................
percent, and greater than 0.5 percent ...........................................................................................
percent ...........................................................................................................................................
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
For the reasons stated in the
preamble, the Federal Deposit Insurance
Corporation is amending part 324 of
chapter III of Title 12, Code of Federal
Regulations as follows:
PART 324—CAPITAL ADEQUACY OF
FDIC–SUPERVISED INSTITUTIONS
10. The authority section for part 324
continues to read as follows:
■
Authority: 12 U.S.C. 1815(a), 1815(b),
1816, 1818(a), 1818(b), 1818(c), 1818(t),
1819(Tenth), 1828(c), 1828(d), 1828(i),
1828(n), 1828(o), 1831o, 1835, 3907, 3909,
4808; 5371; 5412; Pub. L. 102–233, 105 Stat.
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub.
L. 102–242, 105 Stat. 2236, 2355, as amended
by Pub. L. 103–325, 108 Stat. 2160, 2233 (12
U.S.C. 1828 note); Pub. L. 102–242, 105 Stat.
2236, 2386, as amended by Pub. L. 102–550,
106 Stat. 3672, 4089 (12 U.S.C. 1828 note);
Pub. L. 111–203, 124 Stat. 1376, 1887 (15
U.S.C. 78o–7 note).
11. Revise § 324.403(b)(1)(v) to read as
follows:
■
tkelley on DSK3SPTVN1PROD with RULES
*
*
*
*
(b) * * *
(1) * * *
(v) Beginning on January 1, 2018 and
thereafter, an FDIC-supervised
institution that is a subsidiary of a
covered BHC will be deemed to be well
capitalized if the FDIC-supervised
institution satisfies paragraphs (b)(1)(i)
through (iv) of this section and has a
supplementary leverage ratio of 6.0
percent or greater. For purposes of this
paragraph, a covered BHC means a U.S.
top-tier bank holding company with
more than $700 billion in total assets as
reported on the company’s most recent
Consolidated Financial Statement for
Bank Holding Companies (FR Y–9C) or
more than $10 trillion in assets under
custody as reported on the company’s
VerDate Mar<15>2010
16:24 Apr 30, 2014
Jkt 232001
Dated: April 8, 2014.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, April 10, 2014.
Robert deV. Frierson,
Secretary of the Board.
Dated at Washington, DC, this 8th day of
April, 2014.
By order of the Board of Directors.
Robert E. Feldman,
Executive Secretary, Federal Deposit
Insurance Corporation.
[FR Doc. 2014–09367 Filed 4–30–14; 8:45 am]
BILLING CODE P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2010–1160; Directorate
Identifier 2010–NM–148–AD; Amendment
39–17698; AD 2013–25–02]
RIN 2120–AA64
§ 324.403 Capital measures and capital
category definitions.
*
most recent Banking Organization
Systemic Risk Report (FR Y–15); and
*
*
*
*
*
Airworthiness Directives; The Boeing
Company Airplanes
Federal Aviation
Administration (FAA), DOT.
ACTION: Final rule.
AGENCY:
We are superseding
Airworthiness Directive (AD) 2000–11–
06 for certain The Boeing Company
Model 767 airplanes. AD 2000–11–06
required repetitive inspections to detect
discrepancies of the wiring and
surrounding Teflon sleeves of the fuel
tank boost pumps and override/jettison
pumps; replacement of the sleeves with
new sleeves, for certain airplanes; and
repair or replacement of the wiring and
sleeves with new parts, as necessary.
This new AD requires reducing the
initial compliance time and repetitive
inspection interval in AD 2000–11–06;
SUMMARY:
PO 00000
Frm 00015
Fmt 4700
Sfmt 4700
No payout ratio limitation applies.
60 percent.
40 percent.
20 percent.
0 percent.
mandates a terminating action for the
repetitive inspections to eliminate wire
damage; removes certain airplanes from
the applicability; and requires revising
the maintenance program to incorporate
changes to the airworthiness limitations
section. This AD was prompted by fleet
information indicating that the
repetitive inspection interval in AD
2000–11–06 is too long, because
excessive chafing of the sleeving
continues to occur much earlier than
expected between scheduled
inspections. We are issuing this AD to
detect and correct chafing of the fuel
pump wire insulation and consequent
exposure of the electrical conductor,
which could result in electrical arcing
between the wires and conduit and
consequent fire or explosion of the fuel
tank.
DATES: This AD is effective June 5, 2014.
The Director of the Federal Register
approved the incorporation by reference
of certain publications listed in this AD
as of June 5, 2014.
ADDRESSES: For service information
identified in this AD, contact Boeing
Commercial Airplanes, Attention: Data
& Services Management, P.O. Box 3707,
MC 2H–65, Seattle, Washington 98124–
2207; telephone 206–544–5000,
extension 1; fax 206–766–5680; Internet
https://www.myboeingfleet.com. You
may view this referenced service
information at the FAA, Transport
Airplane Directorate, 1601 Lind Avenue
SW., Renton, WA. For information on
the availability of this material at the
FAA, call 425–227–1221.
Examining the AD Docket
You may examine the AD docket on
the Internet at https://
www.regulations.gov by searching for
and locating Docket No. FAA–2010–
1160; or in person at the Docket
Management Facility between 9 a.m.
and 5 p.m., Monday through Friday,
except Federal holidays. The AD docket
contains this AD, the regulatory
evaluation, any comments received, and
other information. The address for the
E:\FR\FM\01MYR1.SGM
01MYR1
]]>Agencies
[Federal Register Volume 79, Number 84 (Thursday, May 1, 2014)]
[Rules and Regulations]
[Pages 24528-24541]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-09367]
[[Page 24528]]
=======================================================================
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DEPARTMENT OF TREASURY
Office of the Comptroller of the Currency
12 CFR Part 6
[Docket ID OCC-2013-0008]
RIN 1557-AD69
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 217
[Regulation H and Q; Docket No. R-1460]
RIN 7100-AD 99
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 324
RIN 3064-AE01
Regulatory Capital Rules: Regulatory Capital, Enhanced
Supplementary Leverage Ratio Standards for Certain Bank Holding
Companies and Their Subsidiary Insured Depository Institutions
AGENCIES: Office of the Comptroller of the Currency, Treasury; the
Board of Governors of the Federal Reserve System; and the Federal
Deposit Insurance Corporation.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are
adopting a final rule that strengthens the agencies' supplementary
leverage ratio standards for large, interconnected U.S. banking
organizations (the final rule). The final rule applies to any U.S. top-
tier bank holding company (BHC) with more than $700 billion in total
consolidated assets or more than $10 trillion in assets under custody
(covered BHC) and any insured depository institution (IDI) subsidiary
of these BHCs (together, covered organizations). In the revised
regulatory capital rule adopted by the agencies in July 2013 (2013
revised capital rule), the agencies established a minimum supplementary
leverage ratio of 3 percent, consistent with the minimum leverage ratio
adopted by the Basel Committee on Banking Supervision (BCBS), for
banking organizations subject to the agencies' advanced approaches
risk-based capital rules. The final rule establishes enhanced
supplementary leverage ratio standards for covered BHCs and their
subsidiary IDIs. Under the final rule, an IDI that is a subsidiary of a
covered BHC must maintain a supplementary leverage ratio of at least 6
percent to be well capitalized under the agencies' prompt corrective
action (PCA) framework. The Board also is adopting in the final rule a
supplementary leverage ratio buffer (leverage buffer) for covered BHCs
of 2 percent above the minimum supplementary leverage ratio requirement
of 3 percent. The leverage buffer functions like the capital
conservation buffer for the risk-based capital ratios in the 2013
revised capital rule. A covered BHC that maintains a leverage buffer of
tier 1 capital in an amount greater than 2 percent of its total
leverage exposure is not subject to limitations on distributions and
discretionary bonus payments under the final rule.
Elsewhere in today's Federal Register, the agencies are proposing
changes to the 2013 revised capital rule's supplementary leverage
ratio, including changes to the definition of total leverage exposure,
which would apply to all advanced approaches banking organizations and
thus, if adopted, would affect banking organizations subject to this
final rule.
DATES: The final rule is effective January 1, 2018.
FOR FURTHER INFORMATION CONTACT:
OCC: Roger Tufts, Senior Economic Advisor, (202) 649-6981; Nicole
Billick, Risk Expert, (202) 649-7932, Capital Policy; or Carl Kaminski,
Counsel; or Henry Barkhausen, Attorney, Legislative and Regulatory
Activities Division, (202) 649-5490, Office of the Comptroller of the
Currency, 400 7th Street SW., Washington, DC 20219.
Board: Constance M. Horsley, Assistant Director, (202) 452-5239;
Juan C. Climent, Senior Supervisory Financial Analyst, (202) 872-7526;
or Sviatlana Phelan, Senior Financial Analyst, (202) 912-4306, Capital
and Regulatory Policy, Division of Banking Supervision and Regulation;
or Benjamin McDonough, Senior Counsel, (202) 452-2036; April C. Snyder,
Senior Counsel, (202) 452-3099; or Mark C. Buresh, Attorney, (202) 452-
5270, Legal Division, Board of Governors of the Federal Reserve System,
20th and C Streets NW., Washington, DC 20551. For the hearing impaired
only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FDIC: George French, Deputy Director, gfrench@fdic.gov; Bobby R.
Bean, Associate Director, bbean@fdic.gov; Ryan Billingsley, Chief,
Capital Policy Section, rbillingsley@fdic.gov; Karl Reitz, Chief,
Capital Markets Strategies Section, kreitz@fdic.gov; Capital Markets
Branch, Division of Risk Management Supervision,
regulatorycapital@fdic.gov or (202) 898-6888; or Mark Handzlik,
Counsel, mhandzlik@fdic.gov; Michael Phillips, Counsel,
mphillips@fdic.gov; Rachel Ackmann, Senior Attorney,
rackmann@fddic.gov; Supervision Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Background
On August 20, 2013, the agencies published in the Federal Register,
for public comment, a joint notice of proposed rulemaking (the 2013
NPR) to strengthen the agencies' supplementary leverage ratio standards
for large, interconnected U.S. banking organizations.\1\ As noted in
the 2013 NPR, the recent financial crisis showed that some financial
companies had grown so large, leveraged, and interconnected that their
failure could pose a threat to overall financial stability. The sudden
collapses or near-collapses of major financial companies were among the
most destabilizing events of the crisis. As a result of the imprudent
risk taking of major financial companies and the severe consequences to
the financial system and the economy associated with the disorderly
failure of these companies, the U.S. government (and many foreign
governments in their home countries) intervened on an unprecedented
scale to reduce the impact of, or prevent, the failure of these
companies and the attendant consequences for the broader financial
system.
---------------------------------------------------------------------------
\1\ 78 FR 51101 (August 20, 2013).
---------------------------------------------------------------------------
A perception persists in the markets that some companies remain
``too big to fail,'' posing an ongoing threat to the financial system.
First, the perception that certain companies are ``too big to fail''
reduces the incentives of shareholders, creditors and counterparties of
these companies to discipline excessive risk-taking by the companies.
Second, it produces competitive distortions because those companies can
often fund themselves at a lower cost than other companies. This
distortion is unfair to smaller companies, damaging to fair
competition, and may artificially encourage further consolidation and
concentration in the financial system.
An important objective of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (Dodd-Frank Act) is to mitigate the
threat to financial stability posed by systemically-
[[Page 24529]]
important financial companies.\2\ The agencies have sought to address
this concern through enhanced supervisory programs, including
heightened supervisory expectations for large, complex institutions and
stress testing requirements. In addition, the Dodd-Frank Act mandates
the implementation of a multi-pronged approach to address this concern:
A new orderly liquidation authority for financial companies (other than
banks and insurance companies); the establishment of the Financial
Stability Oversight Council, empowered with the authority to designate
nonbank financial companies for Board supervision (designated nonbank
financial companies); stronger regulation of large BHCs and designated
nonbank financial companies through enhanced prudential standards; and
enhanced regulation of over-the-counter (OTC) derivatives, other core
financial markets and financial market utilities.
---------------------------------------------------------------------------
\2\ See, e.g., Public Law 111-203, 124 Stat. 1376, 1394, 1571,
1803 (2010).
---------------------------------------------------------------------------
This final rule builds on these efforts by adopting enhanced
supplementary leverage ratio standards for the largest and most
interconnected U.S. banking organizations. The agencies have broad
authority to set regulatory capital standards.\3\ As a general matter,
the agencies' authority to set regulatory capital requirements and
standards for the institutions they regulate derives from the
International Lending Supervision Act (ILSA) \4\ and the PCA provisions
\5\ of the Federal Deposit Insurance Act (FDIA). In enacting ILSA,
Congress codified its intentions, providing that ``it is the policy of
the Congress to assure that the economic health and stability of the
United States and the other nations of the world shall not be adversely
affected or threatened in the future by imprudent lending practices or
inadequate supervision.'' \6\ ILSA encourages the agencies to work with
their international counterparts to establish effective and consistent
supervisory policies, standards, and practices and specifically
provides the agencies authority to set broadly applicable minimum
capital levels \7\ as well as individual capital requirements.\8\
Additionally, ILSA specifically directs U.S. regulators to encourage
governments, central banks, and bank regulatory authorities in other
major banking countries to work toward maintaining and, where
appropriate, strengthening the capital bases of banking institutions
involved in international banking.\9\ With its focus on international
lending and the safety of the broader financial system, ILSA provides
the agencies with the authority to consider an institution's
interconnectedness and other systemic factors when setting capital
standards.
---------------------------------------------------------------------------
\3\ The agencies have authority to establish capital
requirements for depository institutions under the prompt corrective
action provisions of the Federal Deposit Insurance Act (12 U.S.C.
1831o). In addition, the Federal Reserve has broad authority to
establish various regulatory capital standards for BHCs under the
Bank Holding Company Act and the Dodd-Frank Act. See, for example,
sections 165 and 171 of the Dodd-Frank Act (12 U.S.C. 5365 and 12
U.S.C. 5371).
\4\ 12 U.S.C. 3901-3911.
\5\ 12 U.S.C. 1831o.
\6\ 12 U.S.C. 3901(a).
\7\ ``Each appropriate Federal banking agency shall cause
banking institutions to achieve and maintain adequate capital by
establishing levels of capital for such banking institutions and by
using such other methods as the appropriate Federal banking agency
deems appropriate.'' 12 U.S.C. 3907(a)(1).
\8\ ``Each appropriate Federal banking agency shall have the
authority to establish such minimum level of capital for a banking
institution as the appropriate Federal banking agency, in its
discretion, deems to be necessary or appropriate in light of the
particular circumstances of the banking institution.'' 12 U.S.C.
3907(a)(2).
\9\ 12 U.S.C. 3907(b)(3)(C).
---------------------------------------------------------------------------
As part of the overall prudential framework for bank capital, the
agencies have long expected institutions to maintain capital well above
regulatory minimums and have monitored banking organizations' capital
adequacy through the supervisory process in accordance with this
expectation. This expectation is also codified for IDIs in the
statutory PCA framework, which requires the agencies to establish
capital ratio thresholds for both leverage and risk-based capital that
banking organizations must satisfy to be considered well capitalized.
Additionally, section 165 of the Dodd-Frank Act requires the Board
to develop enhanced prudential standards for BHCs with total
consolidated assets of $50 billion or more and for designated nonbank
companies (together, section 165 covered companies).\10\ The Dodd-Frank
Act requires that prudential standards for section 165 covered
companies include enhanced leverage standards. In general, the Dodd-
Frank Act directs the Board to implement enhanced prudential standards
that strengthen existing micro-prudential supervision and regulation of
individual companies and incorporate macro-prudential considerations to
reduce threats posed by section 165 covered companies to the stability
of the financial system as a whole. The enhanced prudential standards
must increase in stringency based on the systemic footprint and risk
characteristics of individual companies. When differentiating among
companies for purposes of applying the standards established under
section 165, the Board may consider the companies' size, capital
structure, riskiness, complexity, financial activities, and any other
risk-related factors the Board deems appropriate.\11\
---------------------------------------------------------------------------
\10\ See 12 U.S.C. 5365; 77 FR 593 (January 5, 2012); and 77 FR
76627 (December 28, 2012).
\11\ 12 U.S.C. 5365(a)(2)(A).
---------------------------------------------------------------------------
In the agencies' experience, strong capital is an important
safeguard that helps financial institutions navigate periods of
financial or economic stress. Maintenance of a strong capital base at
the largest, systemically important institutions is particularly
important because capital shortfalls at these institutions can
contribute to systemic distress and can have material adverse economic
effects. Higher capital standards for these institutions would place
additional private capital at risk, thereby reducing the risks for the
Deposit Insurance Fund while improving the ability of these
institutions to serve as a source of credit to the economy during times
of economic stress. Furthermore, the agencies believe that the enhanced
supplementary leverage ratio standards would reduce the likelihood of
resolutions, and would allow regulators to tailor resolution efforts
were a resolution to become necessary. By further enhancing the capital
strength of covered organizations, the enhanced supplementary leverage
ratio standards could counterbalance possible funding cost advantages
that these organizations may enjoy as a result of being perceived as
``too big to fail.''
A. The Supplementary Leverage Ratio
The 2013 revised capital rule comprehensively revises and
strengthens the capital regulations applicable to banking
organizations.\12\ It strengthens the definition of regulatory capital,
increases the minimum risk-based capital requirements for all banking
organizations, and modifies the requirements for how banking
organizations calculate risk-weighted assets. The 2013 revised capital
rule also retains the generally applicable leverage ratio requirement
(generally applicable leverage ratio) that the agencies believe to be a
simple and transparent measure of capital adequacy that is credible to
market participants and ensures a meaningful amount of capital is
available to absorb losses. The minimum generally applicable leverage
[[Page 24530]]
ratio requirement \13\ of 4 percent applies to all IDIs, and is the
``generally applicable'' leverage ratio for purposes of section 171 of
the Dodd-Frank Act. Accordingly, the minimum tier 1 leverage ratio
requirement for depository institution holding companies is also 4
percent.\14\
---------------------------------------------------------------------------
\12\ 78 FR 55340 (September 10, 2013) (FDIC) and 78 FR 62018
(October 11, 2013) (OCC and Board). On April 8, 2014, the FDIC
adopted as final the 2013 revised capital rule, with no substantive
changes.
\13\ The generally applicable leverage ratio under the 2013
revised capital rule is the ratio of a banking organization's tier 1
capital to its average total consolidated assets as reported on the
banking organization's regulatory report minus amounts deducted from
tier 1 capital.
\14\ 12 U.S.C. 5371.
---------------------------------------------------------------------------
In the 2013 revised capital rule, the agencies established a
minimum supplementary leverage ratio requirement of 3 percent for
banking organizations subject to the banking agencies' advanced
approaches rules (advanced approaches banking organizations) \15\ based
on the BCBS's Basel III leverage ratio (Basel III leverage ratio) as it
was established at the time.\16\ The agencies believe the introduction
of the leverage ratio by the BCBS is an important step in improving the
framework for international capital standards. The Basel III leverage
ratio is a non-risk-based measure of tier 1 capital relative to an
exposure amount that includes both on- and off-balance sheet exposures.
The agencies implemented the Basel III leverage ratio through the
supplementary leverage ratio, which the agencies believe to be
particularly relevant for large, complex organizations that are
internationally active and often have substantial off-balance sheet
exposures.
---------------------------------------------------------------------------
\15\ A banking organization is subject to the advanced
approaches rule if it has consolidated assets of at least $250
billion, if it has total consolidated on-balance sheet foreign
exposures of at least $10 billion, if it elects to apply the
advanced approaches rule, or it is a subsidiary of a depository
institution, bank holding company, or savings and loan holding
company that uses the advanced approaches to calculate risk-weighted
assets. See 78 FR 62018, 62204 (October 11, 2013); 78 FR 55340,
55523 (September 10, 2013).
\16\ The BCBS is a committee of banking supervisory authorities,
which was established by the central bank governors of the G-10
countries in 1975. It currently consists of senior representatives
of bank supervisory authorities and central banks from Argentina,
Australia, Belgium, Brazil, Canada, China, France, Germany, Hong
Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico,
the Netherlands, Russia, Saudi Arabia, Singapore, South Africa,
Sweden, Switzerland, Turkey, the United Kingdom, and the United
States. Documents issued by the BCBS are available through the Bank
for International Settlements Web site at https://www.bis.org. See
BCBS, ``Basel III: A global regulatory framework for more resilient
banks and banking systems'' (December 2010 (revised June 2011)),
available at https://www.bis.org/publ/bcbs189.htm.
---------------------------------------------------------------------------
The agencies' supplementary leverage ratio is the arithmetic mean
of the ratio of an advanced approaches banking organization's tier 1
capital to total leverage exposure (each as defined in the 2013 revised
capital rule) calculated as of the last day of each month in the
reporting quarter. In contrast to the denominator of the agencies'
generally applicable leverage ratio, which includes only on-balance
sheet assets, the denominator for the supplementary leverage ratio is
based on a banking organization's total leverage exposure, which
includes all on-balance sheet assets and many off-balance sheet
exposures. The 2013 revised capital rule requires that an advanced
approaches banking organization calculate and report its supplementary
leverage ratio beginning in 2015 and maintain a supplementary leverage
ratio of at least 3 percent beginning in 2018.
Because total leverage exposure includes off-balance sheet
exposures, for any given company with material off-balance sheet
exposures the amount of capital required to meet the supplementary
leverage ratio will exceed the amount of capital that is required to
meet the generally applicable leverage ratio, assuming that both ratios
are set at the same level. To illustrate, as the agencies noted in the
2013 NPR, based on supervisory estimates for a group of advanced
approaches banking organizations using supervisory data as of third
quarter 2012,\17\ a 5 percent supplementary leverage ratio corresponds
to roughly a 7.2 percent generally applicable leverage ratio and a 6
percent supplementary leverage ratio corresponds to roughly an 8.6
percent generally applicable leverage ratio. According to supervisory
estimates, 2013 data yield similar results. These estimates represent
averages and the numbers vary from institution to institution.
---------------------------------------------------------------------------
\17\ The supervisory estimates were generated using CCAR
September 2012 and CCAR September 2013 data.
---------------------------------------------------------------------------
The agencies noted in the 2013 revised capital rule and in the 2013
NPR that the BCBS planned to collect additional data from institutions
in member countries and potentially make adjustments to the Basel III
leverage ratio requirement. The agencies indicated that they would
review any modifications to the Basel III leverage ratio made by the
BCBS and consider proposing to modify the supplementary leverage ratio
consistent with those revisions, as appropriate.
In June 2013, the BCBS published and requested comment on a
consultative paper that proposed significant modifications to the
denominator of the Basel III leverage ratio (consultative paper).\18\
The consultative paper proposed a number of approaches that generally
would increase the denominator of the leverage ratio originally set out
in the 2010 Basel III framework. Based on its review of comments on the
consultative paper, in January 2014, the BCBS adopted certain aspects
of the proposals in the consultative paper as well as other changes to
the denominator (BCBS 2014 revisions).\19\ The BCBS has indicated that
it will continue to study the Basel III leverage ratio through the
implementation phase into 2017 and will consider further modifications
to the ratio.
---------------------------------------------------------------------------
\18\ See BCBS ``Revised Basel III leverage ratio framework and
disclosure requirements--consultative document'' (June 2013)
available at https://www.bis.org/publ/bcbs251.htm.
\19\ See BCBS ``Basel III leverage ratio framework and
disclosure requirements'' (January 2014) available at https://www.bis.org/publ/bcbs270.htm.
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As discussed further below, several commenters raised concerns
about the agencies' intention to adopt the proposed enhanced
supplementary leverage ratio standards while the BCBS continues to
revise the Basel III leverage ratio. The agencies believe that it is
important to maintain consistency with international standards, as
appropriate, for internationally active banking organizations and,
accordingly, have published a separate notice of proposed rulemaking
elsewhere in today's Federal Register that seeks public comment on
revisions to the denominator of the supplementary leverage ratio that
would be applicable to advanced approaches banking organizations (2014
NPR). These proposed revisions are generally consistent with the BCBS
2014 revisions.
The agencies also believe that it is important to establish
enhanced supplementary leverage ratio standards for the largest, most
interconnected banking organizations to strengthen the overall
regulatory capital framework in the United States. Therefore, after
reviewing comments on the 2013 NPR, the agencies are finalizing the
enhanced supplementary leverage ratio standards substantially as
proposed, based on the methodology for determining the supplementary
leverage ratio in the 2013 revised capital rule. As discussed further
below, the agencies believe the proposed changes to the supplementary
leverage ratio denominator in the 2014 NPR would be responsive to some
of the concerns that commenters raised in connection with the 2013 NPR.
The agencies will carefully consider all comments received on the
proposed revisions to the supplementary leverage
[[Page 24531]]
ratio calculation in the 2014 NPR, including those related to the
impact of the proposed changes on advanced approaches banking
organizations' capital requirements.
B. The Proposed Enhanced Supplementary Leverage Ratio Standards
The 2013 NPR proposed applying enhanced supplementary leverage
standards to any U.S. top-tier BHC that has more than $700 billion in
total consolidated assets or more than $10 trillion in assets under
custody and any IDI subsidiary of such a BHC.\20\ As explained in the
2013 NPR, the list of covered BHCs identified by these thresholds is
consistent with the list of banking organizations that meet the BCBS
definition of a global systemically important bank (G-SIB), based on
year-end 2011 data.\21\ In November 2011, the BCBS released a document
entitled, Global Systemically Important Banks (G-SIBs): Assessment
methodology and the additional loss absorbency requirement, which sets
out a framework for a new capital surcharge for G-SIBs (BCBS G-SIB
framework).\22\ The BCBS G-SIB framework incorporates five broad
characteristics of a banking organization that the agencies consider to
be good proxies for, and correlated with, systemic importance: Size,
complexity, interconnectedness, lack of substitutes, and cross-border
activity. Further, the Board believes that the criteria and methodology
used by the BCBS to identify G-SIBs are consistent with the criteria it
must consider under the Dodd-Frank Act when tailoring enhanced
prudential standards based on the systemic footprint and risk
characteristics of individual section 165 covered companies.\23\
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\20\ Under the 2013 NPR, applicability of the proposed enhanced
supplementary leverage ratio standards would have been determined
based on assets reported on a BHC's most recent Consolidated
Financial Statement for Bank Holding Companies (FR Y-9C) or based on
assets under custody as reported on a BHC's most recent Banking
Organization Systemic Risk Report (FR Y-15).
\21\ In November 2012, the Financial Stability Board and BCBS
published a list of banks that meet the BCBS definition of a G-SIB
based on year-end 2011 data. A revised list based on year-end 2012
data was published November 11, 2013 (available at https://www.financialstabilityboard.org/publications/r_131111.pdf). The
U.S. top-tier bank holding companies that are currently identified
as G-SIBs are Bank of America Corporation, The Bank of New York
Mellon Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JP
Morgan Chase & Co., Morgan Stanley, State Street Corporation, and
Wells Fargo & Company.
\22\ Available at https://www.bis.org/publ/bcbs207.pdf. The BCBS
published a revised version of this document in July 2013, available
at https://www.bis.org/publ/bcbs255.pdf.
\23\ See 12 U.S.C. 5365(a).
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Under the 2013 NPR, a covered BHC would have been subject to a
leverage buffer composed of tier 1 capital, in addition to the minimum
3 percent supplementary leverage ratio requirement established in the
2013 revised capital rule. Under the 2013 NPR, a covered BHC that
maintains a leverage buffer of tier 1 capital in an amount greater than
2 percent of its total leverage exposure would not have been subject to
limitations on its distributions and discretionary bonus payments. If a
covered BHC were to maintain a leverage buffer of 2 percent or less, it
would have been subject to increasingly strict limitations on its
distributions and discretionary bonus payments. The proposed leverage
buffer followed the same general mechanics and structure as the capital
conservation buffer contained in the 2013 revised capital rule. Any
constraints on distributions and discretionary bonus payments resulting
from a covered BHC maintaining a leverage buffer of 2 percent or less
would have been independent of any constraints imposed by the capital
conservation buffer or other supervisory or regulatory measures.
As noted in the 2013 NPR, the 2013 revised capital rule
incorporated the 3 percent supplementary leverage ratio minimum
requirement into the PCA framework as an adequately capitalized
threshold for IDIs subject to the advanced approaches risk-based
capital rules, but did not establish a well-capitalized threshold for
this ratio. Under the 2013 NPR, an IDI that is a subsidiary of a
covered BHC would have been required to satisfy a 6 percent
supplementary leverage ratio to be considered well-capitalized for PCA
purposes.
II. Summary of Comments on the 2013 NPR
The agencies sought comment on all aspects of the 2013 NPR and
received approximately 30 public comments from banking organizations,
trade associations representing the banking or financial services
industry, supervisory authorities, public interest advocacy groups,
private individuals, members of Congress, and other interested parties.
In general, comments from financial services firms, banking
organizations, banking trade associations and other industry groups
were critical of the 2013 NPR, while comments from organizations
representing smaller banks or their supervisors, public interest
advocacy groups and the public generally were supportive of the 2013
NPR. A detailed discussion of commenters' concerns and the agencies'
response follows.
A. Timing of the Final Rule
A number of commenters made reference to the BCBS consultative
paper that proposed to revise the denominator for the Basel III
leverage ratio.\24\ While the proposals outlined in the BCBS
consultative paper were not part of the 2013 NPR, commenters stated
that they believe the final BCBS changes eventually will be
incorporated into the U.S. supplementary leverage ratio, and that it
would be premature to finalize the 2013 NPR before the BCBS process is
complete. Commenters recommended that a final rule adopting the
proposed enhanced supplementary leverage ratio standards be delayed
until the BCBS finalized the consultative paper and the Board adopted a
final rule implementing enhanced prudential standards under section 165
of the Dodd Frank Act.\25\ In addition, these commenters argued that
the proposed enhanced supplementary leverage ratio standards, if
applied in conjunction with the denominator changes proposed in the
BCBS consultative paper, would result in inappropriately high capital
charges.
---------------------------------------------------------------------------
\24\ See BCBS, ``Revised Basel III leverage ratio framework and
disclosure requirements--consultative document'' (June 2013),
available at https://www.bis.org/publ/bcbs251.htm.
\25\ The Board's proposed rules to implement the provisions of
sections 165 and 166 of the Dodd-Frank Act for bank holding
companies with total consolidated assets of $50 billion or more and
for nonbank financial firms supervised by the Board (domestic
proposal) and for foreign banking organizations with total
consolidated assets of $50 billion or more and foreign nonbank
financial companies supervised by the Board (foreign proposal) can
be found at 77 FR 594 (January 5, 2012) and 77 FR 76628 (December
28, 2012) for the domestic proposal and foreign proposal,
respectively. The Board's final rule implementing these provisions
is available at https://www.federalreserve.gov/newsevents/press/bcreg/20140218a.htm.
---------------------------------------------------------------------------
The agencies emphasize that the 2013 NPR did not propose or seek
comment on the revisions to the supplementary leverage ratio
denominator that were being considered by the BCBS. The agencies are
moving forward with the finalization of the proposed enhanced
supplementary leverage ratio standards to further enhance the capital
position of covered organizations and to strengthen financial
stability. As noted earlier, the agencies are seeking comment elsewhere
in today's Federal Register on the 2014 NPR, which proposes revisions
to the definition of total leverage exposure in the 2013 revised
capital rule as well as other proposed requirements relating to the
supplementary leverage ratio that would reflect the BCBS 2014
revisions. The
[[Page 24532]]
agencies believe that the proposed revisions to the definition of total
leverage exposure in the 2014 NPR are responsive to a number of
concerns that commenters expressed about the relationship between the
BCBS process and the supplementary leverage ratio. As noted above, the
agencies will carefully review all comments received on the 2014 NPR.
B. Scope of Application
The 2013 NPR would have applied enhanced supplementary leverage
ratio standards to the largest, most interconnected U.S. BHCs and their
subsidiary IDIs (specifically, to any U.S. top-tier BHC with more than
$700 billion in total consolidated assets or more than $10 trillion in
assets under custody and any IDI subsidiary of these BHCs).\26\ Several
commenters criticized the 2013 NPR's scope of application, including
the proposed quantitative thresholds for determining applicability of
the enhanced supplementary leverage ratio standards. These commenters
stated that tying the application of the 2013 NPR to size alone would
not be appropriate, as size is not always a reliable indicator of the
degree of risk to financial stability. In addition, commenters stated
that the quantitative thresholds may capture the G-SIBs today, but
there is no assurance that this will be the case in the future. A few
commenters asserted that applicability should be based on the systemic
risk posed by an institution's failure and not just on quantitative
thresholds. For instance, one commenter suggested extending the
applicability of the final rule beyond the largest financial
institutions to institutions that are smaller, but nonetheless are
integral parts of the financial system. A few commenters favored
expanding the quantitative thresholds of the 2013 NPR to include
additional banking organizations, for example, by applying the proposed
enhanced supplementary leverage ratio standards to all advanced
approaches banking organizations. Some commenters asserted that using
assets under custody as one of the metrics to determine the 2013 NPR's
applicability significantly overstates the risk of the custody bank
business model. In addition, several commenters suggested that it is
not clear that the enhanced supplementary leverage ratio standards are
necessary or appropriate for any organization. These commenters stated
that substantial steps have been taken toward addressing ``too big to
fail'' concerns, and that the 2013 NPR should not be extended to
banking organizations that, in the commenters' view, may not present
systemic risk.
---------------------------------------------------------------------------
\26\ Under the 2013 revised capital rule, a ``subsidiary'' is
defined as a company controlled by another company, and a person or
company ``controls'' a company if it: (1) Owns, controls, or holds
with power to vote 25 percent or more of a class of voting
securities of the company; or (2) consolidates the company for
financial reporting purposes. See section 2 of the 2013 revised
capital rule.
---------------------------------------------------------------------------
The agencies have decided to finalize the proposed enhanced
supplementary leverage ratio standards, including the proposed
applicability thresholds, substantively as proposed. In the agencies'
view, the proposed asset thresholds capture banking organizations that
are so large or interconnected that they pose substantial systemic
risk. As explained above, these banking organizations have also been
identified by the BCBS as G-SIBs, which are subject to heightened risk-
based capital standards under the Basel framework. The agencies believe
the application of the enhanced supplementary leverage ratio standards
to covered organizations is an appropriate way to further strengthen
the ability of the these organizations to remain a going concern during
times of economic stress and to minimize the likelihood that problems
at these organizations would contribute to financial instability.
The agencies continue to believe that the benefits to financial
stability of the enhanced supplementary leverage ratio standards are
most pronounced for these large and systemically important
institutions, and have decided not to extend these enhanced standards
to smaller institutions. In addition, as also discussed in the 2013
NPR, it is anticipated that over time, as the BCBS G-SIB framework is
implemented in the United States or revised by the BCBS, the agencies
may consider modifying the scope of application of the enhanced
supplementary leverage ratio standards to align more closely with the
scope of application of the BCBS G-SIB framework. In addition, the
agencies will otherwise continue to evaluate the applicability
thresholds and may consider revising them in the future to ensure they
remain appropriate.
C. Calibration of the Enhanced Supplementary Leverage Ratio Standards
The agencies received several comments expressing concern with the
proposed calibration of the enhanced supplementary leverage ratio
standards. Commenters stated that the proposed enhanced supplementary
leverage ratio standards should be set no higher than those that would
apply to banking organizations in other jurisdictions to maintain the
competitive position of covered organizations with respect to their
foreign competitors. A number of commenters viewed the proposed
calibration as arbitrary, stating that it should be supported by
quantitative studies of the cumulative impact of the enhanced
supplementary leverage ratio standards and other financial reforms on
the ability of U.S. banking organizations to provide financial services
to customers and businesses. A number of commenters stated that the
2013 NPR would cause the supplementary leverage ratio to become the
binding regulatory capital constraint, rather than a backstop to the
risk-based capital measures, and expressed concern that an unintended
consequence of a binding supplementary leverage ratio could be that
covered organizations would divest lower risk assets and instead assume
more risk, to the detriment of financial stability.
Some commenters expressed concern that a binding supplementary
leverage ratio could have negative consequences, including the creation
of disincentives for banking organizations to engage in robust risk
assessment and management practices. Furthermore, according to
commenters, the 2013 NPR could incentivize banking organizations to
engage in financial activities with a higher risk-reward profile as
there would be no regulatory capital benefit for holding low-risk
assets, potentially resulting in institutions that are less stable. For
instance, one commenter stated that unsecured commercial loans would be
more attractive than secured lines of credit because the former have a
stronger return on assets and both would require equal amounts of
regulatory capital under the supplementary leverage ratio framework.
The commenter warned that in the mortgage banking industry, this could
constrain warehouse lines of credit needed to finance the production of
new mortgages and mortgage-backed securities. Another commenter stated
that the proposed enhanced supplementary leverage ratio standards could
make it uneconomical for covered organizations to hold or provide
unfunded revolving lines of credit with maturities of less than one
year, cash, U.S. Treasuries, reverse repurchase agreements, certain
traditional interest rate swaps, and credit default swaps on corporate
bonds. Other commenters maintained that the 2013 NPR could incentivize
banking organizations to hold the lowest quality assets possible within
the constraints of the other credit quality regulations and, thus,
would be fundamentally at odds with the
[[Page 24533]]
agencies' proposed liquidity coverage ratio (LCR) by encouraging
banking organizations to divest low-risk assets above the minimum
required by the proposed LCR.\27\ In addition, according to commenters,
banking organizations would find high-volume, low-risk and low-return,
client-driven financial activities less profitable, such as deposit
taking. As such, commenters stated that a binding leverage ratio would
result in higher prices, less liquidity, and reduction of business
lines that have lower returns on assets.
---------------------------------------------------------------------------
\27\ On November 29, 2013, the agencies issued a joint notice of
proposed rulemaking that would implement quantitative liquidity
requirements for certain banking organizations. See 78 FR 71818
(November 29, 2013).
---------------------------------------------------------------------------
Some commenters recommended that the agencies use a more tailored
approach to calibrate the proposed enhanced supplementary leverage
ratio standards, for example by proposing a leverage buffer for covered
BHCs that would be aligned with the capital surcharges provided in the
BCBS G-SIB framework. These commenters asserted that there is
significant diversity among G-SIBs in risk profile, operating
structure, and approaches to balance sheet management and that a one-
size-fits-all approach is unduly punitive for banking organizations
with significant amounts of highly liquid, low-risk assets.
In contrast, a few commenters stated that the supplementary
leverage ratio is a more accurate measure of regulatory capital than
the risk-based capital ratios, easier to understand, comparable across
firms, less prone to manipulation and, therefore, should be the binding
capital standard. Commenters supported a revised calibration as strong,
or stronger, than the one set forth in the 2013 NPR. For example, some
commenters suggested substantially increasing the proposed enhanced
supplementary leverage ratio standards for covered organizations (for
example, by implementing an 8 percent well-capitalized threshold for
any IDI subsidiary of a covered BHC and a 4 or 5 percent leverage
buffer (in addition to the minimum 3 percent) for covered BHCs). These
commenters argued that incentivizing covered organizations to be better
capitalized as a group through the proposed standards would improve
their ability to provide credit during periods of economic stress.
Others supported either increasing or maintaining the proposed
calibration of the enhanced supplementary leverage ratio standards by
emphasizing the importance of constraining the risks large institutions
pose to the financial system. Other commenters supported strengthening
the supplementary leverage ratio standards based on their view that the
risk-based capital framework is subjective and may excessively rely on
the use of models.
With regard to the concerns raised by commenters about potential
competitive disadvantages for covered organizations as a result of the
proposed enhanced supplementary leverage ratio standards, in the
agencies' experience, a strong regulatory capital base is a competitive
strength for banking organizations, rather than a competitive weakness.
Specifically, strong capital promotes confidence among banking
organizations' market counterparties and bolsters the ability of
banking organizations to lend and otherwise serve customers during
stressed market conditions. The agencies are of the view that a
strongly capitalized banking system also promotes the resilience of the
broader economy because it promotes the stability of the financial
system, which allows a wide range of firms to efficiently access
funding and liquidity to meet their business needs. The agencies also
note that banking organizations in the U.S. have long been subject to a
leverage ratio framework, whereas banking organizations in other
jurisdictions generally have not been subject to any leverage
requirement. The agencies do not believe this longstanding difference
has adversely affected the competitive strength of U.S. banking
organizations. Finally, the agencies believe that the benefits to the
banking and financial system from more resilient systemically important
banking organizations outweigh any potential competitive disadvantages
of related implementation costs that covered organizations may face.
With regard to the comments asserting that the proposed enhanced
supplementary leverage ratio standards were arbitrary, the 2013 NPR
described the agencies' approach to calibration. According to the
agencies' analysis, a 3 percent minimum supplementary leverage ratio
would have been too low to have meaningfully constrained the buildup of
leverage at the largest institutions in the years leading up to the
financial crisis. To address this issue the agencies proposed the
enhanced supplementary leverage ratio standards.
The agencies believe that the leverage and risk-based capital
ratios play complementary roles, with each offsetting potential
weaknesses of the other. The 2013 revised capital rule implemented the
capital conservation buffer framework (which is only applicable to
risk-based capital ratios) and increased risk-based capital
requirements more than it increased leverage requirements, reducing the
ability of the leverage requirements to act as an effective complement
to the risk-based requirements, as they had historically. As a result,
the degree to which covered organizations could potentially benefit
from active management of risk-weighted assets before they breach the
leverage requirements may be greater. As described in the 2013 NPR,
such potential behavior suggests that the increase in stringency of the
leverage and risk-based standards should be more closely calibrated to
each other so that they remain in an effective complementary
relationship. These considerations were important in calibrating the
enhanced supplementary leverage ratio standards. Specifically, the 2013
NPR noted that the proposed enhanced supplementary leverage ratio's
well-capitalized threshold for IDI subsidiaries of covered BHCs and the
proposed leverage buffer for covered BHCs would retain a degree of
proportionality with the stronger tier 1 risk-based capital standards
(including the minimum risk-based capital requirements and the capital
conservation buffer) under the 2013 revised capital rule.
Consistent with the calibration goals described in the 2013 NPR,
the agencies believe that the proposed enhanced supplementary leverage
ratio standards should broadly preserve the historical relationship
between the tier 1 leverage and risk-based capital levels for covered
organizations, rather than fundamentally alter such a relationship as
several commenters suggest. With respect to IDI subsidiaries of covered
BHCs, the increase in stringency in terms of the additional tier 1
capital that would be required to be well capitalized under the
enhanced supplementary leverage ratio standards is roughly equivalent
to the increase in stringency resulting from the application of the
2013 revised capital rule's risk-based capital standards.
Moreover, in response to comments suggesting that the supplementary
leverage ratio well-capitalized threshold for an IDI subsidiary of a
covered BHC should result in the same amount of capital needed by a
covered BHC to meet the minimum supplementary ratio requirement plus
the proposed leverage buffer, the agencies note that the PCA framework
and the proposed leverage buffer were designed for different purposes.
The PCA framework is intended to ensure that problems at depository
institutions are addressed promptly and at the least cost to the
Deposit Insurance Fund. The leverage buffer (as well as the capital
[[Page 24534]]
conservation buffer) was designed and calibrated to provide incentives
to banking organizations to hold sufficient capital to reduce the risk
that their capital levels would fall below their minimum requirements
during times of economic and financial stress. In addition, as
discussed in the 2013 NPR, the relationship between the 5 percent
supplementary leverage ratio for covered BHCs (resulting from the 3
percent minimum supplementary leverage ratio plus the 2 percent
leverage buffer) and the 6 percent supplementary leverage ratio's well-
capitalized threshold for IDI subsidiaries of covered BHCs is generally
structurally consistent with the relationship between the 4 percent
minimum leverage ratio for BHCs and the 5 percent well-capitalized
leverage ratio threshold for IDIs under the generally applicable
regulatory capital framework, including as revised under the 2013
revised capital rule.
The agencies note that the maintenance of a complementary
relationship between the leverage and risk-based capital ratios is
designed to mitigate any regulatory capital incentives for covered
organizations to inappropriately increase their risk profile in
response to a binding supplementary leverage ratio. Similarly, stress
testing provides another mechanism to counterbalance the risk that
these institutions could potentially increase their risk profile in
response to a binding supplementary leverage ratio. If the
supplementary leverage ratio is binding and covered organizations
acquire more higher-risk assets, risk weights should increase until the
risk-based capital framework becomes binding. Conversely, if a binding
risk-based capital ratio induces an institution to expand portfolios
whose risk is insufficiently addressed by the risk-based capital
framework, its total leverage exposure would increase until the
leverage ratio becomes binding. Moreover, the agencies believe that
banking organizations choose their asset mix based on a variety of
factors, including yields available relative to the overall cost of
funds, the need to preserve financial flexibility and liquidity,
revenue generation and the maintenance of market share and business
relationships, and the likelihood that principal will be repaid.
The agencies also believe that the enhanced supplementary leverage
ratio standards, together with the strong risk-based regulatory capital
framework in the 2013 revised capital rule, will increase stability and
improve safety and soundness in the banking system. In particular, the
agencies believe that the complementary relationship between the
enhanced supplementary leverage ratio standards and the risk-based
capital framework under the 2013 revised capital rule will strengthen
capital positions at covered organizations, thereby reducing the
likelihood that they fail or experience severe difficulties.
With regard to the comments suggesting that the calibration of the
enhanced supplementary leverage ratio should vary in accordance with
the specific systemic footprint of a covered organization, the agencies
note that such issues are addressed in part by the risk-differentiation
that exists within the risk-based capital framework. The agencies
believe that all covered organizations, despite differences in business
models, are systemically important and highly interconnected and,
therefore, uniformly-applied leverage capital standards across these
organizations are warranted.
D. Economic Impact of the 2013 NPR on Specific Types of Securities and
Credit Transactions and on the Custody Bank Business Model
Commenters also expressed concern about the effect the 2013 NPR
would have for particular types of transactions and business models.
Commenters asserted that the 2013 NPR would directly affect short-term
securities financing transactions, including repurchase agreements,
reverse repurchase agreements, and revolving lines of credit, among
other similar transactions, by imposing additional capital requirements
on low-risk exposures held by covered organizations when they enter
into these arrangements. Some commenters argued that the enhanced
supplementary leverage ratio standards may encourage covered
organizations to reduce their participation in securities financing
transactions. One commenter also indicated that the 2013 NPR would
result in the entrance into the securities financing transactions
market of smaller, less-experienced, and less well-capitalized
counterparties who may fall outside existing regulatory oversight,
resulting in additional systemic risk due to insufficient oversight of
these counterparties. That commenter argued that the 2013 NPR may
result in the overexposure to individual counterparties, because
covered organizations could conclude that securities financing
transactions are more costly to them and, as a result, may limit the
availability (or the best terms) of this financing to only those asset
managers to whom they provide other lines of service. In addition,
commenters asserted that asset managers might respond by directing
business to a single large banking organization in order to receive the
best terms for securities financing transactions.
Several commenters argued that there would be less flexibility for
mutual fund managers and insurance companies to execute certain
transactions with covered organizations as a result of the enhanced
supplementary leverage ratio standards, which could give rise to less
liquid markets at the time that liquidity is needed the most. These
commenters indicated that when mutual fund redemptions rise because
individual investors desire liquidity, investment managers are required
to meet those redemption requests immediately, and that if many
requests come at once, the investment manager will use securities
financing arrangements to smooth out the flow of capital, rather than
be forced to sell investments in a rapid or disorderly fashion.
Commenters also noted that if securities financing arrangements are
less accessible, an investment manager may incur higher costs related
to the forced sale of underlying securities.
Some commenters suggested that the agencies recalibrate the
enhanced supplementary leverage ratio standards to better reflect the
business model and risk profile of custody banks, either through an
approach tied to each covered company's G-SIB risk-based capital
surcharge (which incorporates various measures to identify systemic
risk) or an adjustment specific to these organizations, because a one-
size-fits-all approach would be unduly punitive for covered
organizations with significant amounts of highly liquid, low-risk
assets. One commenter asserted that custody banks have balance sheets
that are uniquely constructed as they are built around client deposits
derived from the provision of core safekeeping and fund administration
services, whereas most other covered organizations feature extensive
commercial and investment banking operations. Some commenters asserted
that the enhanced supplementary leverage ratio standards would
significantly punish or effectively limit important custody bank
functions such as those which are associated with central bank deposits
and committed facilities. These commenters also noted that the enhanced
supplementary leverage ratio standards may limit the ability of custody
banks to accept deposits, particularly during periods of systemic
stress. One commenter asserted that global payment systems could be
adversely affected by a
[[Page 24535]]
reduction in central bank balances, which are broadly used by banking
organizations to reduce the risk of payment failures and facilitate
consistent and smooth payment flows. In addition, some commenters
asserted that the enhanced supplementary leverage ratio standards would
reduce incentives to hold low-risk assets and would increase the cost
to comply with increased margin requirements, particularly initial
margin, for derivatives transactions. The agencies note that several of
the commenters' concerns were related to aspects of the BCBS
consultative paper.
With regard to the comments expressing concern about the impact of
the enhanced supplementary leverage ratio standards on securities
financing transactions, the agencies believe that certain provisions of
the 2014 NPR would address several of these concerns. In addition, the
agencies believe it is important to consider that counterparties may
view favorably a banking organization's maintenance of a meaningfully
higher supplementary leverage ratio. To the extent this occurs, there
might be some reduction in a banking organization's cost of funds that
potentially offsets any costs related to holding more regulatory
capital. In this regard, the agencies also note that any change in
regulatory capital costs would affect a banking organization's overall
cost of funds only to the extent it affects the weighted average cost
of its deposits, debt, and equity.
The agencies believe that using daily average balance sheet assets,
rather than requiring the average of three end-of-month balances in the
calculation of the supplementary leverage ratio under the 2013 revised
capital rule would be an appropriate way to address the commenters'
concerns on the impact of spikes in deposits and, in the 2014 NPR, are
proposing changes to the calculation of total leverage exposure that
would incorporate this concept.
Likewise, for purposes of determining total leverage exposure, the
2014 NPR would permit cash variation margin that satisfies certain
requirements to reduce the positive mark-to-fair value of derivative
contracts. The agencies believe this proposed revision in the 2014 NPR
would address the commenters' concerns regarding the potential increase
in the cost to comply with increased margin requirements.
E. Measure of Capital Used as the Numerator of the Supplementary
Leverage Ratio
The agencies sought comment on the appropriate measure of capital
for the numerator of the supplementary leverage ratio. Many commenters
supported tier 1 capital as the appropriate measure of capital for the
numerator of the supplementary leverage ratio because it is designed
specifically to absorb losses on a going concern basis and has been
meaningfully strengthened under the 2013 revised capital rule.
One commenter encouraged the agencies to allow covered banking
organizations to include the amount of a covered organization's
allowance for loan and lease losses (ALLL) because it is available to
absorb losses. A few commenters, however, asserted that the numerator
of the supplementary leverage ratio should be common equity tier 1
(CET1) capital. One commenter supported this assertion with the
observation that CET1 capital is the standard most likely to keep an
institution solvent and able to lend during periods of market distress,
and suggested it would be the only measure of capital strength trusted
by the markets during a financial crisis. Another commenter asserted
that a tangible equity measure is preferable because it is the most
simple, transparent, and useful measure of loss-absorbing capital.
One commenter recognized the importance of having a single
definition of tier 1 capital for both risk-based and leverage
requirements, but urged the agencies to revisit the treatment of
unrealized gains and losses included in accumulated other comprehensive
income (AOCI) for large banking organizations under the 2013 revised
capital rule.
The agencies have considered the comments and have decided to
retain tier 1 capital as the numerator of the supplementary leverage
ratio. The agencies agree that CET1 capital is the most conservative
measure of capital defined in the 2013 revised capital rule and has the
highest capacity to absorb losses, similar to most common descriptions
of ``tangible common equity.'' However, as a practical matter for U.S.
banking organizations, tier 1 capital consists of CET1 capital plus
non-cumulative perpetual preferred stock, a form of preferred stock
that the agencies believe has strong loss-absorbing capacity.
Accordingly, the agencies believe that tier 1 capital, as defined in
the 2013 revised capital rule, is an appropriately conservative measure
of capital for the purposes of the supplementary leverage ratio.
Furthermore, tier 1 capital incorporates substantial regulatory
adjustments and deductions that are not typically made from market
measures of tangible equity. Moreover, using tier 1 capital as the
numerator of the supplementary leverage ratio has the advantage of
maintaining consistency with the numerator of the leverage ratio that
has long applied broadly to U.S. banking organizations and that now
applies to banking organizations in other jurisdictions adopting the
Basel III leverage ratio.
With respect to allowing covered banking organizations to include
ALLL as part of the capital measure for the numerator, the agencies
note that ALLL is partially includable in tier 2 capital under the
risk-based capital framework and under the 2013 revised capital rule.
However, ALLL is not includable in tier 1 capital and the agencies
believe that such an inclusion would weaken the quality of tier 1
capital as it relates to the supplementary leverage ratio when compared
to the risk-based capital framework.
The agencies considered comments on the recognition of unrealized
gains and losses in AOCI in connection with the development of the 2013
revised capital rule, which requires advanced approaches banking
organizations to recognize unrealized gains and losses in AOCI for
purposes of determining CET1 capital.\28\ The agencies believe that
requiring a banking organization to reflect unrealized gains and losses
in regulatory capital provides a more accurate depiction of its loss-
absorption capacity at a specific point in time, which is particularly
important for large, internationally active banking organizations. For
this reason and the reasons discussed above, the agencies are retaining
tier 1 capital as the numerator of the enhanced supplementary leverage
ratio standards under this final rule.\29\
---------------------------------------------------------------------------
\28\ Banking organizations that are not subject to the advanced
approaches rule may elect to opt out of the requirement to recognize
unrealized gains and losses in AOCI for purposes of determining CET1
capital.
\29\ See section III.C. of the preamble in the 2013 final
capital rule issued by the Board and OCC for a discussion of
accumulated other comprehensive income. 78 FR 62018, 62026-62027
(October 11, 2013). See section V.B.2.c. of the preamble in the 2013
interim final capital rule issued by the FDIC for a discussion of
accumulated other comprehensive income. 78 FR 55340, 55377-55380
(September 10, 2013).
---------------------------------------------------------------------------
F. Total Leverage Exposure Definition
The 2013 NPR would not have amended the definition of total
leverage exposure (the denominator of the supplementary leverage ratio)
under the 2013 revised capital rule. However, a significant number of
commenters criticized the components and methodology for calculating
total leverage exposure.
[[Page 24536]]
Many commenters asserted that total leverage exposure should be
more risk-sensitive. For instance, commenters encouraged the agencies
to exclude highly liquid assets, such as cash on hand and claims on
central banks, and sovereign securities, particularly U.S. Treasuries,
from total leverage exposure. Commenters maintained that, if the
agencies opt to not exclude risk-free or very low-risk, highly liquid
assets from total leverage exposure, then these assets should be
discounted according to their relative levels of liquidity similar to
the categories of eligible assets under the standardized approach in
the 2013 revised capital rule. In addition, commenters stated that bank
deposits with central banks such as the Federal Reserve Banks should be
excluded in order to accommodate increases in banks' assets, both
temporary and sustained, that occur as a result of macroeconomic
factors and monetary policy decisions, particularly during periods of
financial market stress. Commenters urged the agencies to exclude
assets such as U.S. government obligations securing public sector
entity (PSE) deposits from total leverage exposure. Commenters argued
that a banking organization holding PSE deposits is required to pledge
U.S. Treasuries to collateralize the deposits, and that if U.S.
Treasuries are not excluded from total leverage exposure, the cost of
additional capital would result in higher costs being passed on to the
PSEs. Another commenter, however, asked that the agencies not introduce
any risk-based capital measure into the supplementary leverage
ratio.\30\
---------------------------------------------------------------------------
\30\ One commenter also noted that retaining the proposal to
include U.S. Treasury debt securities in total leverage exposure
could present certain national security concerns.
---------------------------------------------------------------------------
Several commenters encouraged the agencies not to include in total
leverage exposure the notional amount of all off-balance sheet assets,
particularly for undrawn commitments. Commenters stated that using the
notional value is inaccurate, particularly for trade finance and
committed credit lines. Commenters encouraged the agencies to use the
more granular standardized approach credit conversion factors (CCF) in
the 2013 revised capital rule.
With respect to the commenters' request for more risk-sensitivity
in the supplementary leverage ratio calculation, the agencies believe
that excluding categories of assets from the denominator of the
supplementary leverage ratio is generally inconsistent with the
intended role of this ratio as an overall limitation on leverage that
does not differentiate across asset types. Accordingly, the agencies
have decided not to exempt any categories of balance sheet assets from
the denominator of the supplementary leverage ratio in the final rule.
Thus, for example, cash, U.S. Treasuries, and deposits at the Federal
Reserve are included in the denominator of the supplementary leverage
ratio, as has been the case in the agencies' generally applicable
leverage ratio. The agencies recognize the low risk of these assets
under the agencies' risk-based capital rules, which complement the
minimum supplementary leverage ratio requirement and the enhanced
supplementary leverage ratio standards, as discussed above. Excluding
specific categories of assets from the supplementary leverage ratio
denominator would in effect allow banking organizations to finance
these assets exclusively with debt, potentially resulting in a
significant increase in a banking organizations' ability to deploy
financial leverage.
With regard to the comments criticizing the use of the notional
amounts of off-balance sheet commitments for purposes of the
supplementary leverage ratio, the agencies are seeking comment on
proposed changes to the denominator in the 2014 NPR that would include
the use of standardized approach CCFs for most off-balance sheet
commitments.
G. Proposed Basel III Leverage Ratio Revisions
A number of commenters were concerned about the relationship
between the enhanced supplementary leverage ratio standards and the
revisions to the Basel III leverage ratio framework proposed by the
BCBS consultative paper, which proposed a leverage ratio exposure
measure that would result in greater reported exposure than the total
leverage exposure as defined in the 2013 revised capital rule.
A number of commenters were concerned that covered organizations
would be placed at a competitive disadvantage relative to foreign
competitors if the enhanced supplementary leverage ratio standards in
the U.S. are set at a higher level than the Basel III leverage ratio.
Some commenters also expressed concern that the proposed BCBS revisions
to the denominator would be inappropriately restrictive and might be
incorporated into the U.S. supplementary leverage ratio. However,
another commenter argued that a stronger leverage ratio standard would
enhance the competitive position of U.S. banking organizations by
improving the relative stability and financial strength of the U.S.
banking system.
One commenter included a study of the impact of the revisions
proposed in the BCBS's consultative paper, and, where relevant, the
U.S. enhanced supplementary leverage ratio standards, on the U.S.
banking industry, products offered by U.S. banks, and U.S. markets. The
study concludes that, on average, U.S. advanced approaches banking
organizations (including U.S. G-SIBs) exceed the 3 percent
supplementary leverage ratio threshold based both on the ratio as
formulated in the Basel III leverage ratio framework and after giving
effect to the BCBS proposed revisions, but when measured against the
proposed enhanced supplementary leverage ratio standards, U.S. advanced
approaches banking organizations would have substantial tier 1 capital
shortfalls. Specifically, the study suggests that if the revisions
proposed in the consultative paper and the proposed enhanced
supplementary leverage ratio standards were both implemented, the U.S.
advanced approaches banking organizations would need $202 billion in
additional tier 1 capital or a reduction in exposures of $3.7 trillion
to meet those standards, and to meet the proposed enhanced
supplementary leverage ratio standards without giving effect to the
BCBS consultative paper changes, these banking organizations would need
to raise $69 billion in additional capital or reduce exposures by $1.2
trillion. The study suggests that if the agencies adopted the Basel
proposed total leverage exposure as contemplated in the consultative
paper in combination with the proposed enhanced supplementary leverage
ratio standards, the leverage ratio would become the binding constraint
for banking organizations holding 67 percent of U.S. G-SIB assets.
One commenter, on the other hand, encouraged the agencies to revise
the denominator of the supplementary leverage ratio in accordance with
the BCBS's consultative paper. This commenter further encouraged the
agencies to restrict derivatives netting permitted under the BCBS
consultative paper and to substantially increase the standardized
measurement of the potential future exposure for derivative
transactions. Similarly, another commenter asked the agencies to
consider the use of International Financial Reporting Standards (IFRS)
for purposes of measuring off-balance sheet derivatives exposures.
Neither the 2013 NPR nor the final rule includes the changes to
total leverage exposure described in the
[[Page 24537]]
BCBS consultative paper. Therefore, the agencies' supplementary
leverage ratio is consistent with the international leverage ratio
established by the BCBS in 2010. The agencies' analysis of the impact
of this final rule is summarized in the next section of this preamble.
As discussed above, in January 2014 the BCBS adopted certain
aspects of the proposals outlined in the BCBS consultative paper as
well as other changes to the denominator. The changes to the
denominator included, among other items, revising CCFs for certain off-
balance sheet exposures, incorporating the notional amount of sold
credit protection (that is, credit derivatives sold by a banking
organization acting as a credit protection provider) in total leverage
exposure, and modifying the measure of exposure for derivatives and
repo-style transactions, including changes to the criteria for
recognizing netting for repo-style transactions and cash collateral for
derivatives. The agencies believe that the changes introduced by the
BCBS strengthen the Basel III leverage ratio in important ways. In the
2014 NPR, published elsewhere in today's Federal Register, the agencies
are proposing revisions to the supplementary leverage ratio that are
generally consistent with the BCBS 2014 revisions. The agencies believe
that the proposed revisions to the definition of total leverage
exposure published in the 2014 NPR are responsive to a number of
concerns that commenters expressed about the relationship between the
BCBS process and the supplementary leverage ratio. In this regard, the
agencies will carefully review all comments received on these aspects
of the definition of total leverage exposure in the 2014 NPR.
H. Impact Analysis
Commenters suggested that, in addition to waiting for the BCBS to
finalize the denominator of the Basel leverage ratio, the agencies
should conduct a quantitative impact study to assess the cumulative
impact of bank capital and other financial reform regulations on the
ability of U.S. banking organizations to provide financial services to
consumers and businesses.
In the 2013 NPR, the agencies cited data from the Board's
Comprehensive Capital Analysis and Review (CCAR) process in which all
of the agencies participate. This information reflects banking
organizations' own projections of their supplementary leverage ratios
under the supervisory baseline scenario, including institutions' own
assumptions about earnings retention and other strategic actions.
As noted in the 2013 NPR, in the 2013 CCAR, all 8 covered BHCs met
the 3 percent supplementary leverage ratio as of third quarter 2012,
and almost all projected that their supplementary leverage ratios would
exceed 5 percent at year-end 2017. If the enhanced supplementary
leverage ratio standards had been in effect as of third quarter 2012,
covered BHCs under the 2013 NPR that did not exceed a minimum
supplementary leverage ratio requirement of 3 percent plus a 2 percent
leverage buffer would have needed to increase their tier 1 capital by
about $63 billion to meet that ratio.
Because CCAR is focused on the consolidated capital of BHCs, BHCs
did not project future Basel III leverage ratios for their IDIs. To
estimate the impact of the 2013 NPR on the lead subsidiary IDIs of
covered BHCs, the agencies assumed that an IDI has the same ratio of
total leverage exposure to total assets as its BHC. Using this
assumption and CCAR 2013 projections, all 8 lead subsidiary IDIs of
covered BHCs were estimated to meet the 3 percent supplementary
leverage ratio as of third quarter 2012. If the enhanced supplementary
leverage ratio standards had been in effect as of third quarter 2012,
the lead subsidiary IDIs of covered BHCs that did not meet a 6 percent
supplementary leverage ratio would have needed to increase their tier 1
capital by about $89 billion to meet that ratio.
In finalizing the rule, the agencies updated their supervisory
estimates of the amount of tier 1 capital that would be required for
covered BHCs and their lead subsidiary IDIs to meet the enhanced
supplementary leverage ratio standards. Using updated CCAR estimates,
all 8 covered BHCs meet the 3 percent supplementary leverage ratio as
of fourth quarter 2013. If the enhanced supplementary leverage ratio
standards had been in effect as of fourth quarter 2013, CCAR data
suggests that covered BHCs that would not have met a 5 percent
supplementary leverage ratio would have needed to increase their tier 1
capital by about $22 billion to meet that ratio.
Assuming that an IDI has the same ratio of total leverage exposure
to total assets as its BHC to estimate the impact at the IDI level, the
updated CCAR data indicates that all 8 lead subsidiary IDIs of covered
BHCs meet the 3 percent supplementary leverage ratio as of fourth
quarter 2013. If the enhanced supplementary leverage ratio standards
had been in effect as of fourth quarter 2013, the updated CCAR data
suggests that the lead subsidiary IDIs of covered BHCs that did not
meet a 6 percent ratio would have needed to increase their tier 1
capital by about $38 billion to meet that ratio. The agencies believe
that the affected covered BHCs and their subsidiary IDIs would be able
to effectively manage their capital structures to meet the enhanced
supplementary leverage ratio standards in the final rule by January 1,
2018. The agencies believe that this transition period should help to
reduce any short-term consequences and allow covered organizations to
adjust smoothly to the new supplementary leverage ratio standards.
I. Advanced Approaches Framework
The agencies sought comment on whether in light of the proposed
enhanced supplementary leverage ratio standards and ongoing
standardized risk-based capital floors, the agencies should consider,
in some future regulatory action, simplifying or eliminating portions
of the advanced approaches rule if they are unnecessary or duplicative.
One commenter stated that mandatory application of the advanced
approaches rule is based on an outdated size-based threshold, and that
the agencies should review the thresholds for mandatory application of
the advanced approaches risk-based capital rules and consider whether,
in light of recently implemented reforms to the regulatory capital
framework, the criteria remain appropriate or whether they should be
refined given the purpose of those rules. Another commenter recommended
delaying consideration of the proposed enhanced supplementary leverage
ratio standards pending the review and completion of regulatory
initiatives based on the BCBS's discussion paper entitled, The
regulatory framework: balancing risk sensitivity, simplicity and
comparability.\31\
---------------------------------------------------------------------------
\31\ Available at https://www.bis.org/publ/bcbs258.pdf.
---------------------------------------------------------------------------
The agencies are not proposing any changes to the advanced
approaches rule in connection with the final rule. As with any aspect
of the regulatory capital framework, the agencies will continue to
evaluate the appropriateness of the requirements of the advanced
approaches rule in light of this final rule and the ongoing evolution
of the U.S. financial regulatory framework.
III. Description of the Final Rule
For the reasons discussed above, and consistent with the transition
provisions set forth in subpart G of the 2013 revised capital rule, the
agencies have decided to adopt the 2 percent leverage buffer for
covered BHCs and the 6
[[Page 24538]]
percent well-capitalized threshold for subsidiary IDIs of covered BHCs
effective on January 1, 2018. The final rule implements the provisions
in the 2013 NPR as proposed. Accordingly, the final rule applies to any
U.S. top-tier BHC with more than $700 billion in total consolidated
assets or more than $10 trillion in assets under custody and any
advanced approaches IDI subsidiary of such BHCs.
As further discussed above, the agencies are proposing elsewhere in
the Federal Register changes to the calculation of the supplementary
leverage ratio that would amend the 2013 revised capital rule and
change the basis for calculating the supplementary leverage ratio.
Under the final rule, a covered BHC that maintains a leverage
buffer greater than 2 percent of its total leverage exposure is not
subject to the rule's limitations on its distributions and
discretionary bonus payments.\32\ If the covered BHC maintains a
leverage buffer of 2 percent or less, it is subject to increasingly
stricter limitations on such payouts. An IDI that is a subsidiary of a
covered BHC is required to satisfy a 6 percent supplementary leverage
ratio to be considered well capitalized for PCA purposes. The leverage
ratio PCA thresholds under the 2013 revised capital rule and this final
rule are shown in Table 1.
---------------------------------------------------------------------------
\32\ See section 11(a)(4) of the 2013 revised capital rule.
Table 1--Leverage Ratio PCA Levels
----------------------------------------------------------------------------------------------------------------
Supplementary
leverage ratio for Supplementary leverage
PCA category Generally applicable advanced approaches ratio for subsidiary IDIs
leverage ratio (percent) banking organizations of covered BHCs (percent)
(percent)
----------------------------------------------------------------------------------------------------------------
Well Capitalized.................. >=5....................... Not applicable....... >=6.
Adequately Capitalized............ >=4....................... >=3.................. >=3.
Undercapitalized.................. <4........................ <3................... <3.
Significantly Undercapitalized.... <3........................ Not applicable....... Not applicable.
Critically Undercapitalized....... Tangible equity (defined Not applicable....... Not applicable.
as tier 1 capital plus
non-tier 1 perpetual
preferred stock) to Total
Assets <=2.
----------------------------------------------------------------------------------------------------------------
Note: The supplementary leverage ratio includes many off-balance sheet exposures in its denominator; the
generally applicable leverage ratio does not.
All advanced approaches banking organizations must calculate and
begin reporting their supplementary leverage ratios beginning in the
first quarter of 2015. However, the enhanced supplementary leverage
ratio standards for covered organizations set forth in the final rule
do not become effective until January 1, 2018.
IV. Regulatory Analysis
A. Paperwork Reduction Act (PRA)
There is no new collection of information pursuant to the PRA (44
U.S.C. 3501 et seq.) contained in this final rule. The agencies did not
receive any comment on their PRA analysis.
B. Regulatory Flexibility Act Analysis
OCC
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA) requires
an agency, in connection with a final rule, to prepare a Final
Regulatory Flexibility Act analysis describing the impact of the rule
on small entities (defined by the Small Business Administration for
purposes of the RFA to include banking entities with total assets of
$500 million or less) or to certify that the rule will not have a
significant economic impact on a substantial number of small entities.
Using the SBA's size standards, as of December 31, 2013, the OCC
supervised 1,195 small entities.\33\
---------------------------------------------------------------------------
\33\ The OCC calculated the number of small entities using the
SBA's size thresholds for commercial banks and savings institutions,
and trust companies, which are $500 million and $35.5 million,
respectively. 78 FR 37409 (June 20, 2013). Consistent with the
General Principles of Affiliation 13 CFR 121.103(a), the OCC counted
the assets of affiliated financial institutions when determining
whether to classify a national bank or Federal savings association
as a small entity. The OCC used December 31, 2013, to determine size
because a ``financial institution's assets are determined by
averaging the assets reported on its four quarterly financial
statements for the preceding year.'' See footnote 8 of the U.S.
Small Business Administration's Table of Size Standards.
---------------------------------------------------------------------------
As described in the SUPPLEMENTARY INFORMATION section of the
preamble, the final rule strengthens the supplementary leverage ratio
standards for covered BHCs and their IDI subsidiaries. Because the
final rule applies only to covered BHCs and their IDI subsidiaries, it
does not impact any OCC-supervised small entities. Therefore, the OCC
certifies that the final rule will not have a significant economic
impact on a substantial number of OCC-supervised small entities.
Board
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA) requires
an agency to provide a final regulatory flexibility analysis with a
final rule or to certify that the rule will not have a significant
economic impact on a substantial number of small entities (defined for
purposes of the RFA beginning on July 22, 2013, to include banks with
assets less than or equal to $500 million) \34\ and publish its
analysis or a summary, or its certification and a short, explanatory
statement, in the Federal Register along with the final rule.
---------------------------------------------------------------------------
\34\ See 13 CFR 121.201. Effective July 22, 2013, the Small
Business Administration revised the size standards for banking
organizations to $500 million in assets from $175 million in assets.
78 FR 37409 (June 20, 2013).
---------------------------------------------------------------------------
The Board is providing a final regulatory flexibility analysis with
respect to this final rule. As discussed above, this final rule is
designed to enhance the safety and soundness of U.S. top-tier bank
holding companies with at least $700 billion in consolidated assets or
at least $10 trillion in assets under custody (covered BHCs), and the
insured depository institution subsidiaries of covered BHCs. The Board
received no public comments on the proposed rule from members of the
general public or from the Chief Counsel for Advocacy of the Small
Business Administration. Thus, no issues were raised in public comments
relating to the Board's initial regulatory flexibility act analysis and
no changes are being made in response to such comments.
Under regulations issued by the Small Business Administration, a
small entity includes a depository institution or
[[Page 24539]]
bank holding company with total assets of $500 million or less (a small
banking organization). As of December 31, 2013, there were 627 small
state member banks. As of December 31, 2013, there were approximately
3,676 small bank holding companies. No small top-tier bank holding
company would meet the threshold provided in the final rule, so there
would be no additional projected compliance requirements imposed on
small bank holding companies. One covered bank holding company has one
small state member bank subsidiary, which would be covered by the final
rule. The Board expects that any small banking organization covered by
the final rule would rely on its parent banking organization for
compliance and would not bear additional costs.
The Board believes that the final rule will not have a significant
economic impact on small banking organizations supervised by the Board
and therefore believes that there are no significant alternatives to
the final rule that would reduce the economic impact on small banking
organizations supervised by the Board.
FDIC
The RFA requires an agency to provide an FRFA with a final rule or
to certify that the rule will not have a significant economic impact on
a substantial number of small entities (defined for purposes of the RFA
to include banking entities with total assets of $500 million or
less).\35\
---------------------------------------------------------------------------
\35\ Effective July 22, 2013, the SBA revised the size standards
for banking organizations to $500 million in assets from $175
million in assets. 78 FR 37409 (June 20, 2013).
---------------------------------------------------------------------------
As described in sections I and III of this preamble, the final rule
strengthens the supplementary leverage ratio standards for covered BHCs
and their advanced approaches IDI subsidiaries. As of December 31,
2013, 1 (out of 3,394) small state nonmember bank and no (out of 303)
small state savings associations were advanced approaches IDI
subsidiaries of a covered BHC. Therefore, the FDIC does not believe
that the final rule will result in a significant economic impact on a
substantial number of small entities under its supervisory
jurisdiction.
The FDIC certifies that the final rule does not have a significant
economic impact on a substantial number of small FDIC-supervised
institutions.
C. OCC Unfunded Mandates Reform Act of 1995 Determination
Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law
104-4 (Unfunded Mandates Reform Act) provides that an agency that is
subject to the Unfunded Mandates Act must prepare a budgetary impact
statement before promulgating a rule that includes a Federal mandate
that may result in expenditure by State, local, and tribal governments,
in the aggregate, or by the private sector, of $100 million (adjusted
for inflation) or more in any one year. The current inflation-adjusted
expenditure threshold is $141 million. If a budgetary impact statement
is required, section 205 of the UMRA also requires an agency to
identify and consider a reasonable number of regulatory alternatives
before promulgating a rule. The OCC has determined this proposed rule
is likely to result in the expenditure by the private sector of $141
million or more. The OCC has prepared a budgetary impact analysis and
identified and considered alternative approaches. When the final rule
is published in the Federal Register, the full text of the OCC's
analyses will available at: https://www.regulations.gov, Docket ID OCC-
2013-0008.
D. Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies have sought to present
the final rule in a simple and straightforward manner. The agencies did
not receive any comment on their use of plain language.
List of Subjects
12 CFR Part 6
National banks.
12 CFR Part 208
Confidential business information, Crime, Currency, Federal Reserve
System, Mortgages, Reporting and recordkeeping requirements,
Securities.
12 CFR Part 217
Administrative practice and procedure, Banks, Banking, Capital,
Federal Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 324
Administrative practice and procedure, Banks, banking, Capital
Adequacy, Reporting and recordkeeping requirements, Savings
associations, State non-member banks.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the preamble and under the authority
of 12 U.S.C. 93a, 1831o, and 5412(b)(2)(B), the Office of the
Comptroller of the Currency amends part 6 of chapter I of title 12,
Code of Federal Regulations as follows:
PART 6--PROMPT CORRECTIVE ACTION
0
1. The authority citation for part 6 continues to read as follows:
Authority: 12 U.S.C. 93a, 1831o, 5412(b)(2)(B).
0
2. Amend Sec. 6.4 by revising paragraph (c)(1)(iv) to read as follows:
Sec. 6.4 Capital measures and capital category definition.
* * * * *
(c) * * *
(1) * * *
(iv) Leverage Measure:
(A) The national bank or Federal savings association has a leverage
ratio of 5.0 percent or greater; and
(B) With respect to a national bank or Federal savings association
that is a subsidiary of a U.S. top-tier bank holding company that has
more than $700 billion in total assets as reported on the company's
most recent Consolidated Financial Statement for Bank Holding Companies
(FR Y-9C) or more than $10 trillion in assets under custody as reported
on the company's most recent Banking Organization Systemic Risk Report
(Y-15), on January 1, 2018 and thereafter, the national bank or Federal
savings association has a supplementary leverage ratio of 6.0 percent
or greater; and
* * * * *
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the preamble, chapter II of title 12
of the Code of Federal Regulations is amended as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
0
3. The authority citation for part 208 is revised to read as follows:
[[Page 24540]]
Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-
338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),
1833(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x,
1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, 3905-3909, and 5371;
15 U.S.C. 78b, 78I(b), 78l(i), 780-4(c)(5), 78q, 78q-1, and 78w,
1681s, 1681w, 6801, and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a,
4104a, 4104b, 4106 and 4128.
0
4. In Sec. 208.41, redesignate paragraphs (c) through (j) as
paragraphs (d) through (k), and add a new paragraph (c) to read as
follows:
Sec. 208.41 Definitions for purposes of this subpart.
* * * * *
(c) Covered BHC means a covered BHC as defined in Sec. 217.2 of
Regulation Q (12 CFR 217.2).
* * * * *
0
5. Amend Sec. 208.43 as follows:
0
a. Add paragraph (a)(2)(iv)(C).
0
b. Revise paragraph (c)(1)(iv).
Sec. 208.43 Capital measures and capital category definitions.
(a) * * *
(2) * * *
(iv) * * *
(C) With respect to any bank that is a subsidiary (as defined in
Sec. 217.2 of Regulation Q (12 CFR 217.2)) of a covered BHC, on
January 1, 2018, and thereafter, the supplementary leverage ratio.
* * * * *
(c) * * *
(1) * * *
(iv) Leverage Measure:
(A) The bank has a leverage ratio of 5.0 percent or greater; and
(B) Beginning on January 1, 2018, with respect to any bank that is
a subsidiary of a covered BHC under the definition of ``subsidiary'' in
section 217.2 of Regulation Q (12 CFR 217.2), the bank has a
supplementary leverage ratio of 6.0 percent or greater; and
* * * * *
PART 217--CAPITAL ADEQUACY OF BOARD-REGULATED INSTITUTIONS
0
6. The authority citation for part 217 is revised to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371.
0
7. Amend Sec. 217.1 by revising paragraph (f)(4) to read as follows:
Sec. 217.1 Purpose, applicability, reservations of authority, and
timing.
* * * * *
(f) * * *
(4) Beginning January 1, 2018, a covered BHC (as defined in Sec.
217.2) is subject to limitations on distributions and discretionary
bonus payments in accordance with the lower of the maximum payout
amount as determined under Sec. 217.11(a)(2)(iii) and the maximum
leverage payout amount as determined under Sec. 217.11(a)(2)(vi).
0
8. In Sec. 217.2 add a definition of ``covered BHC'' in alphabetical
order to read as follows:
Sec. 217.2 Definitions.
* * * * *
Covered BHC means a U.S. top-tier bank holding company that has
more than $700 billion in total assets as reported on the company's
most recent Consolidated Financial Statements for Holding Companies (FR
Y-9C) or more than $10 trillion in assets under custody as reported on
the company's most recent Banking Organization Systemic Risk Report (FR
Y-15).
* * * * *
0
9. In Sec. 217.11
0
A. Add new paragraphs (a)(2)(v) and (a)(2)(vi), and (c);
0
B. Revise paragraph (a)(4); and
0
C. Add Table 2 to read as follows.
Sec. 217.11 Capital conservation buffer and countercyclical capital
buffer amount.
(a) * * *
(2) * * *
(v) Maximum leverage payout ratio. The maximum leverage payout
ratio is the percentage of eligible retained income that a covered BHC
can pay out in the form of distributions and discretionary bonus
payments during the current calendar quarter. The maximum leverage
payout ratio is based on the covered BHC's leverage buffer, calculated
as of the last day of the previous calendar quarter, as set forth in
Table 2 of this section.
(vi) Maximum leverage payout amount. A covered BHC's maximum
leverage payout amount for the current calendar quarter is equal to the
covered BHC's eligible retained income, multiplied by the applicable
maximum leverage payout ratio, as set forth in Table 2 of this section.
* * * * *
(4) Limits on distributions and discretionary bonus payments. (i) A
Board-regulated institution shall not make distributions or
discretionary bonus payments or create an obligation to make such
distributions or payments during the current calendar quarter that, in
the aggregate, exceed the maximum payout amount or, as applicable, the
maximum leverage payout amount.
(ii) A Board-regulated institution that has a capital conservation
buffer that is greater than 2.5 percent plus 100 percent of its
applicable countercyclical capital buffer, in accordance with paragraph
(b) of this section, and, if applicable, that has a leverage buffer
that is greater than 2.0 percent, in accordance with paragraph (c) of
this section, is not subject to a maximum payout amount or maximum
leverage payout amount under this section.
(iii) Negative eligible retained income. Except as provided in
paragraph (a)(4)(iv) of this section, a Board-regulated institution may
not make distributions or discretionary bonus payments during the
current calendar quarter if the Board-regulated institution's:
(A) Eligible retained income is negative; and
(B) Capital conservation buffer was less than 2.5 percent, or, if
applicable, leverage buffer was less than 2.0 percent, as of the end of
the previous calendar quarter.
* * * * *
(c) Leverage buffer--(1) General. A covered BHC is subject to the
lower of the maximum payout amount as determined under paragraph
(a)(2)(iii) of this section and the maximum leverage payout amount as
determined under paragraph (a)(2)(vi) of this section.
(2) Composition of the leverage buffer. The leverage buffer is
composed solely of tier 1 capital.
(3) Calculation of the leverage buffer. (i) A covered BHC's
leverage buffer is equal to the covered BHC's supplementary leverage
ratio minus 3 percent, calculated as of the last day of the previous
calendar quarter based on the covered BHC's most recent Consolidated
Financial Statement for Bank Holding Companies (FR Y-9C).
(ii) Notwithstanding paragraph (c)(3)(i) of this section, if the
covered BHC's supplementary leverage ratio is less than or equal to 3
percent, the covered BHC's leverage buffer is zero.
[[Page 24541]]
Table 2 to Sec. 217.11--Calculation of Maximum Leverage Payout Amount
------------------------------------------------------------------------
Maximum leverage payout ratio (as
Leverage buffer a percentage of eligible retained
income)
------------------------------------------------------------------------
Greater than 2.0 percent............ No payout ratio limitation
applies.
Less than or equal to 2.0 percent, 60 percent.
and greater than 1.5 percent.
Less than or equal to 1.5 percent, 40 percent.
and greater than 1.0 percent.
Less than or equal to 1.0 percent, 20 percent.
and greater than 0.5 percent.
Less than or equal to 0.5 percent... 0 percent.
------------------------------------------------------------------------
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
For the reasons stated in the preamble, the Federal Deposit
Insurance Corporation is amending part 324 of chapter III of Title 12,
Code of Federal Regulations as follows:
PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS
0
10. The authority section for part 324 continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233,
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242,
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160,
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386,
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).
0
11. Revise Sec. 324.403(b)(1)(v) to read as follows:
Sec. 324.403 Capital measures and capital category definitions.
* * * * *
(b) * * *
(1) * * *
(v) Beginning on January 1, 2018 and thereafter, an FDIC-supervised
institution that is a subsidiary of a covered BHC will be deemed to be
well capitalized if the FDIC-supervised institution satisfies
paragraphs (b)(1)(i) through (iv) of this section and has a
supplementary leverage ratio of 6.0 percent or greater. For purposes of
this paragraph, a covered BHC means a U.S. top-tier bank holding
company with more than $700 billion in total assets as reported on the
company's most recent Consolidated Financial Statement for Bank Holding
Companies (FR Y-9C) or more than $10 trillion in assets under custody
as reported on the company's most recent Banking Organization Systemic
Risk Report (FR Y-15); and
* * * * *
Dated: April 8, 2014.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, April 10, 2014.
Robert deV. Frierson,
Secretary of the Board.
Dated at Washington, DC, this 8th day of April, 2014.
By order of the Board of Directors.
Robert E. Feldman,
Executive Secretary, Federal Deposit Insurance Corporation.
[FR Doc. 2014-09367 Filed 4-30-14; 8:45 am]
BILLING CODE P
