Regulators Finalize Capital Rule Aimed at Removing Barriers to Low-Risk Banking Activity

Key Takeaways

• Updated Capital Standards: Regulators finalized a rule adjusting leverage capital standards to reduce disincentives for large banks to participate in low-risk activities, including U.S. Treasury market intermediation.
• Subsidiary Leverage Cap: The enhanced supplementary leverage ratio for depository institution subsidiaries is capped at one percent, keeping their total leverage requirement at no more than four percent.
• Backstop Intent: The rule aims to ensure leverage requirements operate strictly as a backstop to risk-based capital rules, particularly during periods of financial stress.
• Minimal Capital Impact: Overall capital levels are expected to remain broadly unchanged, with tier 1 capital requirements for affected holding companies falling by less than two percent.

Deep Dive

Federal banking regulators signed off Tuesday on a rule they say will help large banks stay active in lower-risk markets, especially the critical plumbing of U.S. Treasury trading, without being boxed in by leverage rules that weren’t designed for those activities.

The final rule, issued jointly by the agencies, updates how certain leverage capital standards apply to the country’s largest and most systemically important banking organizations. The goal is to make sure these leverage measures act as a true backstop to the more complex, risk-based capital requirements, rather than discouraging banks from taking on ultra-low-risk work because of how those exposures get counted.

The structure of the rule tracks closely with what regulators put on the table back in June. Banking organizations will still see their leverage requirements set according to each firm’s overall systemic risk. But the agencies also softened the standard for depository institution subsidiaries.

A Calibrated Change for Bank Subsidiaries

Regulators capped the enhanced supplementary leverage ratio for depository institutions at one percent, meaning the total leverage requirement for those subsidiaries will top out at four percent. That is lower than what was originally proposed, and the agencies framed the change as a practical acknowledgement that a bank subsidiary’s risk profile and capital structure don’t always mirror those of the holding company above it.

The tweak also reflects a concern that surfaced during the proposal stage, that leverage rules shouldn’t eclipse risk-based standards during periods of market strain. By capping the eSLR requirement at the subsidiary level, regulators aim to keep the leverage metric in its intended role as a backstop.

Capital Levels Expected to Remain Largely Steady

While the changes shift how capital requirements are calculated, regulators emphasized that the rule isn’t expected to noticeably alter how much capital the sector holds in aggregate. For the bank holding companies affected, tier 1 capital requirements are projected to fall by less than two percent. Subsidiaries would see somewhat larger decreases, though regulators noted that this capital generally cannot be paid out to shareholders due to restrictions at the parent-company level.

The rule also includes necessary adjustments to other regulations that reference leverage capital standards, including the total loss-absorbing capacity and long-term debt requirements.

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