NEW YORK--(BUSINESS WIRE)--The final supplementary leverage ratio (SLR) rule approved by US banking regulators is another step toward enhancing the capital framework of the largest US banking organizations, Fitch Ratings says. While its implications will vary by bank, we see the rule hitting trust and custody banks, namely Bank of New York Mellon Corp. and State Street Corp., harder as they tend to carry large balances of cash and low risk securities.
The rule affects essentially the eight US globally systemically important banks (GSIBs). However, banks with large trust and custody operations could feel its effects most as their holdings of cash and low risk securities earn next to nothing in the present interest rate environment but will attract a 6% capital charge at the banking subsidiary level.
Overall, affected banks not yet in compliance have adequate capital generation and balance sheet flexibility to meet the new standards, and we expect they will likely comply before the 2018 implementation date.
The final rule made some concessions regarding trust and custody banks, chiefly that the leverage ratio denominator will be measured as a daily average, rather than quarter end average. This may help these banks somewhat, as they typically experience large inflows of deposits around quarter end, although it is unclear at the moment how much this concession is worth.
On Tuesday, all three US banking regulators - the Federal Deposit Insurance Corp., Federal Reserve Board and Office of the Comptroller of the Currency - finalized their rule for the SLR, adopting the initial proposal in large part. The SLR will apply to US banks with a top tier bank holding company with more than $700 billion in assets or more than $10 trillion in custody assets. US regulators also proposed aligning the denominator of the SLR (total leverage exposure) to the recently adopted Basel III definition.
The rule will require the eight US GSIBs to maintain a 5% leverage ratio at the holding company level, while banking subsidiaries will face a 6% requirement. These levels are higher than the Basel III leverage ratio standard of 3%. According to US regulators, the estimated capital shortfall to comply with the SLR is $68 billion, the 5% holding company SLR requirement roughly corresponds to a 7.2% generally applicable leverage ratio, and the 6% bank-level SLR corresponds to an 8.6% generally applicable leverage ratio. The effective date of the rule is Jan. 1, 2018. Some affected banks have already disclosed estimated SLRs (based on the initial proposal) and all will be required to do so by 1Q15.
Failure to meet or maintain compliance with the SLR will result in increasing restrictions on a covered institution's ability to make capital distributions or discretionary bonus payments. Moreover, these restrictions would be independent of whether a bank exceeds risk-based capital standards.
While Fitch considers that banks will be able to comply, the SLR will likely constrain balance sheet growth for affected institutions.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.