Fed proposes changing leverage ratios for largest US financial firms

Proposals would make leverage ratios “more closely tailored” to firm’s risk profile, Fed argues
Federal Reserve
Federal Reserve

The Federal Reserve has proposed changing the leverage ratio requirements for the largest US financial firms.

The proposals, published by the Fed and the Office of the Comptroller of the Currency on April 11, say the requirements should fit the ”business activities and risk profiles” of each very large US firm. The rules would apply to all US companies identified as a global systemically important banking organisations (G-Sibs), and their insured depository institution subsidiaries.

The current regulatory framework uses a fixed standard to establish a G-Sib’s enhanced supplementary leverage ratio. The proposed changes would instead tie the based ratio to the risk-based capital surcharge of the firm. The surcharge is “based on the firm’s individual characteristics”, the Fed stated, arguing that “the resulting leverage standard would be more closely tailored to each firm”.

After analysing stress tests’ performance and existing capital requirements, “agency staff estimate that the proposed changes would reduce the required amount of Tier 1 capital for the holding companies of these firms by approximately $400 million,” the Fed says. This would be equal to or “approximately 0.04% in aggregate Tier 1 capital”, it adds.

G-Sibs are now obliged to hold a supplementary ratio above 5%. This results from the minimum 3% and an additional 2% buffer. Their subsidiaries are demanded to have a supplementary ratio of 6%.

The reform would modify the fixed 2% buffer to half of each firm’s risk-based capital surcharge. “For example, if a G-Sib’s risk-based capital surcharge is 2%, it would now be required to maintain a supplementary leverage ratio of more than 4%, which is the sum of the unchanged minimum 3% requirement plus a modified buffer of 1%,” the Fed says.

The Fed and the OCC will accept comments on the proposal in the 30 days following its publication in the Federal Register.

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