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Wednesday, April 9, 2014

Agencies Finalize Supplementary Leverage Ratio for Large Banks

The FDIC, OCC and Federal Reserve Board yesterday approved a supplementary leverage ratio for large, systemically significant financial firms. The FDIC and Fed boards voted unanimously to adopt the ratio, which will take effect in January 2018. This leverage ratio would be in addition to the Basel III capital requirements finalized last year.

The rule, which applies to bank holding companies with over $700 billion in assets (or with over $10 trillion in assets under custody) and their subsidiaries, would require banks to meet a 6% supplementary leverage ratio in order to be considered “well-capitalized” for prompt corrective action purposes, or double the ratio required under Basel III.

Bank holding companies would also be required to maintain a Tier 1 capital leverage buffer of at least 5%. Failure to meet this standard would limit companies’ ability to pay discretionary bonuses and make capital distributions. Although the final ratio remains as proposed, the banking agencies proposed to alter the exposure measure -- the denominator -- in line with the Basel Committee on Banking Supervision’s standard finalized in January.

ABA opposed the original proposal and urged regulators to wait and assess the effects of the Basel Committee’s leverage ratio. The agencies’ supplementary ratio is higher than necessary, ABA said -- so high, in fact, that it might supersede the risk-based capital rules as the principal capital requirement for banks subject to it.

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