The federal bank regulatory agencies have issued a final rule aimed at adjusting certain regulatory capital standards. The objective is to reduce barriers that might prevent banking organizations from participating in lower-risk activities, such as acting as intermediaries in U.S. Treasury markets.
The new rule closely follows a proposal released in June, with some changes affecting depository institution subsidiaries. It modifies leverage capital standards for the largest and most systemically important banking organizations, positioning these standards as a safeguard to risk-based capital requirements. The intention is to avoid discouraging engagement in low-risk activities.
For depository institution subsidiaries, the final rule introduces a cap on the enhanced supplementary leverage ratio standard at one percent. This means the overall requirement for these institutions will not exceed four percent. According to the agencies, this adjustment accounts for differences between the capital needs and systemic risk profiles of parent organizations and their subsidiaries. The change is also designed to ensure that leverage standards serve as a backup to risk-based requirements during periods of financial stress.
The agencies project that this rule will not significantly alter the total amount of capital maintained by banking organizations. They estimate that tier 1 capital requirements for affected bank holding companies will decrease by less than two percent overall. Although depository institution subsidiaries are expected to experience larger reductions, restrictions at the holding company level generally prevent this capital from being distributed externally.
Additionally, the final rule includes updates to other regulations linked to leverage capital standards, including those related to total loss-absorbing capacity and long-term debt requirements.
“The final rule modifies certain leverage capital standards applicable to the largest and most systemically important banking organizations to serve as a backstop to risk-based capital requirements and to avoid discouraging these organizations from engaging in low-risk activities,” according to the joint statement from federal regulators.
“For depository institution subsidiaries, the final rule differs from the proposal by capping the enhanced supplementary leverage ratio standard at one percent, making the overall requirement for these institutions no more than four percent,” stated agency officials.
“In aggregate, the rule will reduce tier 1 capital requirements for affected bank holding companies by less than two percent,” regulators said.
The agencies have also made conforming changes in related regulations tied to leverage standards.
Further details can be found in official documents such as the Federal Register notice (PDF), Board Memo (PDF), Statement by Governor Barr, and Statement by Governor Cook.
