On July 9, 2013, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency each approved the Basel III final capital rules that had been approved a week earlier by the Federal Reserve Board (FRB). At the same time, however, the three agencies also issued a Notice of Proposed Rule-making calling for a Revised Supplementary Leverage Ratio (RSLR) for the eight most systemically significant US banking organizations. We suggested that this second development would occur in a PwC Financial Services Regulatory Brief last month.
The RSLR proposal calls for bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody (covered BHCs) to maintain a tier 1 capital supplementary leverage buffer of at least 2 percent above the minimum supplementary leverage ratio requirement of 3 percent finalized in the Basel III capital rule (for a total of 5 percent). In addition, the RSLR proposal requires insured depository institutions (IDIs) of covered BHCs to meet a 6 percent supplementary leverage ratio in order to be considered “well capitalized.” These supplementary leverage ratios differ from the standard 4% leverage ratio laid out in the final Basel III capital rule by considering exposures to derivatives and other off-balance sheet exposures.
The RSLR proposal also introduces a new enforcement mechanism for covered BHCs. While IDIs under the proposal (and institutions governed by the final Basel III capital rule) must meet the minimum supplementary leverage ratios for prompt corrective action purposes, failure to exceed the RSLR would subject covered BHCs to restrictions on discretionary bonus payments and capital distributions.
The RSLR proposal applies to the eight largest, most systemically significant US banking organizations that had been identified as Globally Significant Important Banks (G-SIBs) in November 2011 by the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board. The proposal would require these G-SIBs to comply by January 1, 2018. A 60-day comment period will begin from the date it is published in the Federal Register.
The eight G-SIB firms, which are at the center of the “too big to fail” debate, are seeing the bar rise beyond the Basel III capital rule. The RSLR is only the first element of more stringent capital over the next six months, especially given FRB Governor Tarullo’s description on July 2nd of three other proposals in the works for the G-SIBs that we described in a Regulatory Brief last week.