[Update: We have prepared a chart (available here) that compares the U.S. banking agencies’ proposed revisions to the SLR with the Basel Committee’s January 2014 revisions to the Basel III leverage ratio.] Today, the U.S. banking agencies finalized higher leverage capital standards for the 8 U.S. bank holding companies that have been identified as global systemically important banks (“U.S. G-SIBs”) and their insured depository institution (“IDI”) subsidiaries. The agencies also proposed important changes to the denominator of the U.S. Basel III supplementary leverage ratio (“SLR”).
U.S. G-SIB Leverage Surcharge
- Consistent with the U.S. banking agencies’ July 2013 proposal, the U.S. G-SIB leverage surcharge will require a U.S. G-SIB’s IDI subsidiaries to maintain an SLR of at least 6% to be considered well-capitalized for regulatory purposes.
- The final rule also requires U.S. G-SIBs, on a global consolidated basis, to maintain a leverage buffer that would function in a similar way to the Basel III capital conservation buffer.
- Specifically, a U.S. G-SIB that does not maintain an SLR of greater than 5%, i.e., a buffer of more than 2% on top of the 3% minimum, will be subject to increasingly stringent restrictions on its ability to make capital distributions and discretionary bonus payments.
|SLR Buffer||Allowed Capital Distributions and Discretionary Bonus Payments|
Buffer > 2.0%
No limit imposed by the U.S. G-SIB leverage surcharge
2.0% ≥ Buffer > 1.5%
Up to 60% of eligible retained income
1.5% ≥ Buffer > 1.0%
Up to 40% of eligible retained income
1.0% ≥ Buffer >0.5%
Up to 20% of eligible retained income
|0.5% ≥ Buffer||
No capital distributions or discretionary bonus payments allowed
Visual Overview of the SLR
Which Organizations Are Affected?
Organizations Subject to the U.S. G-SIB Leverage Surcharge
- A U.S. top-tier bank holding company with at least $700 billion in total consolidated assets or at least $10 trillion in assets under custody and its IDI subsidiaries – this criteria captures the 8 U.S. G-SIBs and their IDI subsidiaries
Organizations Subject to the 3% Minimum SLR Requirement
- Advanced approaches banking organization – a banking organization with ≥ $250 billion in total consolidated assets or ≥ $10 billion of on-balance sheet foreign exposures
- Advanced approaches IHC of foreign bank – U.S. intermediate holding company (IHC) with ≥ $250 billion in total consolidated assets or ≥ $10 billion of on-balance sheet foreign exposures, regardless of whether the IHC is also a bank holding company
- The effective date of the U.S. G-SIB leverage surcharge is January 1, 2018.
- The effective date of the SLR is January 1, 2018.
- Disclosures: Advanced approaches banking organizations must calculate and disclose their SLR beginning in Q1 2015. See U.S. banking agencies’ proposed disclosure table below.
Comparison Chart Showing Proposed Changes to SLR Denominator (Total Leverage Exposure)
- The U.S. banking agencies have proposed a number of changes to the denominator of the SLR, which would apply to all advanced approaches banking organizations and advanced approaches IHCs.
- These changes are generally designed to implement the Basel Committee’s January 2014 revisions to the denominator of the Basel III leverage ratio. Davis Polk’s visual memo of the Basel Committee’s January 2014 revisions is available here.
- The proposal would also make changes to the methodology for calculating the SLR and to the public disclosure requirements.
|Existing SLR Denominator (July 2013 U.S. Basel III final rule)||Proposed SLR Denominator (April 2014)|
|On-balance sheet assets||
|Sold credit protection||
|Repo-style transactions (including securities lending, securities borrowing, repurchase and reverse repurchase transactions)||
|Other off-balance sheet items||
|Timing of calculation||
SLR vs. U.S. Leverage Ratio
- U.S. banking organizations have long been subject to a leverage capital requirement based on the ratio of a banking organization’s Tier 1 capital to its average total consolidated on-balance sheet assets as reported in its regulatory report minus amounts deducted from Tier 1 capital (“U.S. leverage ratio”).
- All U.S. banking organizations and IHCs are subject to a minimum 4% U.S. leverage ratio. An IDI must maintain a U.S. leverage ratio of at least 5% to be considered well-capitalized.
- Difference: A key difference between the SLR and the U.S. leverage ratio is that the former takes into account both on-balance sheet and certain off-balance sheet assets and exposures, whereas the latter only measures a banking organization’s on-balance sheet leverage.
- In the case of a banking organization that has substantial off-balance sheet exposures, the denominator of its SLR would generally be higher than the denominator of its U.S. leverage ratio.
SLR Disclosure Table
Dollar Amounts in Thousands
|Part 1: Summary comparison of accounting assets and total leverage exposure|
|1||Total consolidated assets as reported in published financial statements|
|2||Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation|
|3||Adjustment for fiduciary assets recognized on balance sheet but excluded from total leverage exposure|
|4||Adjustment for derivative exposures|
|5||Adjustment for repo-style transactions|
|6||Adjustment for off-balance sheet exposures (that is, conversion to credit equivalent amounts of off-balance sheet exposures)|
|8||Total leverage exposure|
|Part 2: Supplementary leverage ratio|
|On-balance sheet exposures|
|1||On-balance sheet assets (excluding on-balance sheet assets for repo-style transactions and derivative exposures, but including cash collateral received in derivative transactions)|
|2||LESS: Amounts deducted from tier 1 capital|
|3||Total on-balance sheet exposures (excluding on-balance sheet assets for repo-style transactions and derivative exposures, but including cash collateral received in derivative transactions) (sum of lines 1 and 2)|
|4||Replacement cost for derivative exposures (that is, net of cash variation margin)|
|5||Add-on amounts for potential future exposure (PFE) for derivatives exposures|
|6||Gross-up for cash collateral posted if deducted from the on-balance sheet assets, except for cash variation margin|
|7||LESS: Deductions of receivable assets for cash variation margin posted in derivatives transactions, if included in on-balance sheet assets|
|8||LESS: Exempted CCP leg of client-cleared transactions|
|9||Effective notional principal amount of sold credit protection|
|10||Effective notional principal amount offsets and PFE adjustments for sold credit protection|
|11||Total derivative exposures (sum of lines 4 to 10)|
|12||On-balance sheet assets for repo-style transactions, except include the gross value of receivables for reverse repurchase transactions. Exclude from this item the value of securities received in a security-for-security repo-style transactions where the securities lender has not sold or re-hypothecated the securities received. Include in this item the value of securities sold under a repo-style arrangement.|
|13||LESS: Reduction of the gross value of receivables in reverse repurchase transactions by cash payables in repurchase transactions under netting agreements|
|14||Counterparty credit risk for all repo-style transactions|
|15||Exposure for repo-style transactions where banking organization acts as an agent|
|16||Total exposures for repo-style transactions (sum of lines 12 to 15)|
|Other off-balance sheet exposures|
|17||Off-balance sheet exposures at gross notional amounts|
|18||LESS: Adjustments for conversion to credit equivalent amounts|
|19||Off-balance sheet exposures (sum of lines 17 and 18)|
|Capital and total leverage exposure|
|20||Tier 1 capital|
|21||Total leverage exposure (sum of lines 3, 11, 16 and 19)|
|Supplementary leverage ratio|
|22||Supplementary leverage ratio||