Regulators Close to Finalizing Tougher Leverage Ratio

WASHINGTON — Regulators will soon finalize their plan to establish a new leverage ratio and it is likely to be tougher than a recently implemented global standard, top officials said Thursday.

Testifying before the Senate Banking Committee, Federal Reserve Board Gov. Daniel Tarullo, Federal Deposit Insurance Corp. Chairman Martin Gruenberg, and Comptroller of the Currency Thomas Curry emphasized their intent to press ahead with the rule, which will apply to the eight largest U.S. bank holding companies and their subsidiaries.

Gruenberg said regulators should "move forward quickly" in completing the outstanding rule, which was first proposed in July. He was echoed by Curry, who deemed it a "high priority" for the agency and something that regulators should finish "as quickly as possible."

Officials at the banking agencies had been awaiting the results of the Basel Committee on Banking Supervision's work on its own global leverage standard before finalizing the U.S. rule. The Basel Committee finalized its rule last month, easing up on some of its provisions.

"We know where they've come out," said Tarullo. "The question remains, what's the required minimum ratio going to be, given all that work. It's the intention of the three bank regulatory agencies to have a higher minimum ratio than that prevails in the international forum right now."

The three banking agencies released the proposal in the summer while finalizing new capital standards as part of the Basel III accord. Under the plan, the biggest banks would have to comply with a 5% leverage ratio, while their insured subsidiaries would adhere to a 6% ratio.

Collectively, banks would have to shore up an additional $89 billion in capital to meet the higher leverage requirement, while their insured subsidiaries will have to fill a shortfall of $63 billion.

Those requirements would be in addition to a 4% leverage ratio for all banks that is already part of the finalized Basel III package.

Regulators agreed to tack on additional requirements at the behest of the FDIC officials, who argued that the originally proposed supplemental minimum threshold of 3% was insufficient given the magnitude of problems during the financial crisis.

At the hearing, all three regulators stressed that it was a top priority for their own agencies to finalize the proposal in short order. The new requirement will affect firms like JPMorgan Chase, Citigroup and Bank of America.

"We should adopt both provisions — the final version of the NPR and the supplemental leverage ratio — and also consider adopting changes in the denominator coming out of the Basel Committee," said Curry.

Global regulators agreed to make certain concessions to the biggest banks in their final rule released in January by changing how financial institutions treat derivatives, repurchase agreements and cleared transactions. Such modifications have an impact on how the leverage ratio's denominator is calculated.

The adjustments made by the Basel Committee were intended to allay concerns aired by the industry that the rule reflect the economic realities of certain transactions that banks regularly engage in, such as the clearing of derivatives a bank does on behalf of a customer.

U.S. regulators are not required to accept the changes that the Basel Committee made to the denominator, but all three expressed their intent to adopt alterations in response to the global standards.

"I think what we've been able to do is move towards the point where we've got our definitions harmonized, but we will independently put in a higher leverage ratio than the international standard," said Tarullo.

He noted such changes would strengthen the ratio, including applying a stricter treatment of credit derivatives.

The agencies are also likely to issue a separate proposal that would modify the final Basel III rules agreed upon in July to reflect all changes in the global leverage rule.

The leverage ratio was one of several upcoming rules highlighted during the hearing that are anticipated to be unveiled by regulators in coming months.

Tarullo signaled additional "near-term" priorities, including finalizing a set of enhanced prudential rules for bank holding companies with more than $50 billion in assets along with foreign banks operating in the U.S.

Additionally, he cited a concept proposal to address outstanding risks tied to short-term wholesale funding as a leading task for regulators.

Fed officials have repeatedly stressed the need to eradicate banks' susceptibility to runs as was experienced during the financial crisis.

Tarullo has previously suggested that banks with a heavy reliance on short-term wholesale funding should hold additional capital to buffer against potential runs. He refrained from offering specifics on when a proposal would be released.

The governor also said a capital surcharge for globally systemically important banks would also be forthcoming "fairly soon," which he said would be based on Basel's framework.