Twitter RSS

Capital and Prudential Standards Blog

magnify
Home Advanced Approaches U.S. G-SIB Leverage Surcharge and Proposed SLR Denominator Changes

U.S. G-SIB Leverage Surcharge and Proposed SLR Denominator Changes

[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”).

GSIBleverage

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

USSLRvisual

 

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

 

Compliance Timing

  • 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
  • Include balance sheet carrying value of all on-balance sheet assets less amounts deducted from Tier 1 capital
  • Include balance sheet carrying value of all on-balance sheet assets
  • plus the value of securities sold under a repo-style arrangement that are not included on balance sheet;
  • less amounts deducted from Tier 1 capital; and
  • less the value of securities received in security-for-security repo-style transactions, where the banking organization acts as a securities lender and includes the securities received in its on-balance sheet assets but has not sold or re-hypothecated the securities received
Derivatives
  • Include potential future exposure (PFE) amount for each derivative transaction or each single-product netting set of derivative transactions calculated using the Current Exposure Method (“CEM”) without regard to rules that provide for the recognition of eligible collateral
  • Include PFE amount for each derivative transaction or each single-product netting set of derivative transactions calculated using the CEM without regard to rules that provide for the recognition of eligible collateral.
  • If a banking organization reduces the positive mark-to-fair value of a derivative contract with a counterparty as permitted under the U.S. GAAP offset option, but the cash collateral received does not meet the specified conditions for cash variation margin in the proposal, the banking organization would be required to include the positive mark-to-fair value of the derivative contract gross of any cash collateral in its total leverage exposure.
  • Similarly, if a banking organization offsets the net negative mark-to-fair value of derivative contracts with a counterparty by the amount of any cash collateral posted to the counterparty, and does not include that cash collateral posted to the counterparty in its on-balance sheet assets, as permitted under the U.S. GAAP offset option, but the cash collateral posted does not meet the specified conditions for cash variation margin in the proposal, the banking organization would be required to include such cash collateral in its total leverage exposure.

 

Cleared transactions
  • No special treatment for cleared derivative transactions
  • A clearing member banking organization that guarantees the performance of a clearing member client with respect to a cleared transaction must treat its exposure to the clearing member client as a derivative contract for purposes of determining its total leverage exposure.
  • A clearing member banking organization that does not guarantee the performance of a CCP with respect to a transaction cleared on behalf of a clearing member client may exclude its exposure to the CCP for purposes of determining its total leverage exposure.
  • A clearing member banking organization that guarantees the performance of a CCP with respect to a transaction cleared on behalf of a clearing member client must treat its exposure to the CCP as a derivative contract for purposes of determining its total leverage exposure.
Sold credit protection
  • Sold credit protection in the form of a credit derivative or similar instrument is generally treated like other derivative contracts
  • Include the effective notional principal amount (i.e., the apparent or stated notional principal amount multiplied by any multiplier in the derivative contract) of sold credit protection.
  • May reduce the effective notional principal amount of sold credit protection by any reduction in the mark-to-fair value of the sold credit protection if the reduction is recognized in Common Equity Tier 1 capital.
  • May reduce the effective notional principal amount of sold credit protection by the effective notional principal amount of purchased credit protection if certain conditions are met.
  • May adjust the PFE associated with sold credit protection to avoid double counting of the exposure amount.
Repo-style transactions (including securities lending, securities borrowing, repurchase and reverse repurchase transactions)
  • Include the on-balance sheet carrying value of a repo-style transaction but not any related off-balance sheet exposure for such transactions
  • U.S. GAAP permits the offset of gross values of receivables due from a counterparty under reverse repurchase agreements by the amount of the payments due to the counterparty (that is, amounts recognized as payables to the same counterparty under repurchase agreements), provided the relevant accounting criteria are met.
  • Proposal would specify the criteria for when a banking organization must reverse the U.S. GAAP offset for repo-style transactions.
  • A securities lender may adjust its on-balance sheet assets in security-for-security repo-style transactions in cases where the securities lender does not use the securities received as collateral to further leverage itself (see first row).
  • Introduces a measure of counterparty credit risk for repo-style transactions (including where the banking organization acts as agent for a repo-style transaction), measured as the greater of zero and the total fair value of the instruments, gold, or cash that the banking organization has lent, sold subject to repurchase or provided as collateral to a counterparty for all transactions included in a qualifying master netting agreement (ΣEi), less the total fair value of the instruments, gold, or cash that the banking organization borrowed, purchased subject to resale or received as collateral from the counterparty for those transactions (ΣCi)
  • E* = max {0, [ΣEi – ΣCi]}
  • Where a banking organization acts as agent for a repo-style transaction and provides a guarantee (indemnity) to a customer with regard to the performance of the customer’s counterparty that is greater than the difference between the fair value of the security or cash lent and the fair value of the security or cash borrowed, the banking organization must include the amount of the guarantee that is greater than this difference in its total leverage exposure.
Other off-balance sheet items
  • 10% of the notional amount of unconditionally cancellable commitments made by the banking organization.
  • 100% of the notional amount of all other off-balance sheet exposures (excluding securities lending, securities borrowing, reverse repurchase transactions, derivatives and unconditionally cancellable commitments).
  • Retains 10% credit conversion factor (CCF) for unconditionally cancellable commitments.
  • Replaces uniform 100% CCF for other off-balance sheet items with the standardized risk-based capital CCFs in U.S. Basel III final rule (subject to a CCF floor of 10%)
Timing of calculation
  • SLR is defined as the simple arithmetic mean of the ratio of Tier 1 capital to total leverage exposure calculated as of the last day of each month in the reporting quarter
  • Tier 1 capital (numerator of SLR) would be calculated as of the last day of each reporting quarter.
  • Total leverage exposure (denominator of SLR) would be calculated as the arithmetic mean of the total leverage exposure calculated each day of the reporting quarter

 

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

Tril Bil Mil Thou
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)
7 Other adjustments
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)
Derivative exposures
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)
Repo-style transactions
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

(in percent)

 

twitterlinkedinmailtwitterlinkedinmail
Comments Off.