Banking regulator issues proposal to change current rules

The Federal Deposit Insurance Corporation (FDIC) last Friday (June 6) filed a proposal for reform of the Supplementary Leverage Ratio (SLR) with the Office of Management and Budget (OMB) which is thought to include requests to lighten the capital burden on banks.

The details of the proposal, catchily titled “Modifications to Supplementary Leverage Capital Requirements for Large Banking Organizations; Total Loss-Absorbing Capacity Requirements for US Global Systemically Important Bank Holding Companies,” will not be released until the FDIC has voted on it, and this is likely to be 30-45 days after filing – although it could be sooner.

Reform of the SLR has been on the cards for some time. The 3% minimum SLR, incorporated from Basel III standards finalized in 2011, applies to all category I, II and III banks in the US. Effectively this means all banks over US$250bn in assets. But US regulators slapped on an extra 2% for the GSIBs, taking it up to 5% for the big banks.

Crucially, the SLR is not risk-based. It simply counts up the total amount of assets according to current accounting values and assesses the capital due on that basis.

There is reasonably broadly shared belief that the SLR has been inimical to the health of the US capital markets. For one thing, it discourages holding of risk-free or low risk assets like Treasuries of agency MBS as the SLR due on these is the same as it would be on, say, holdings of high yield bonds or commercial real estate (CRE) assets. When Treasuries were temporarily excluded from the SLR during the market paralysis of the first weeks of the pandemic in 2020, liquidity improved appreciably.

So, any reform of the SLR could entail permanent exclusion of Treasuries, or a more broad-based reduction of the threshold. It could also simply reduce the extra 2% SLR that the GSIBs are required to hold, bringing US rules in line with international standards. However, market experts think this is unlikely as such a narrow proposal would not emanate from the FDIC.  

Moreover, the title of the proposal distinguishes the GSIBs from all ‘large banking organization”; it would not perhaps have done so if the changes suggested applied only to the GSIBs.

However, reform of some kind appears to be in the offing. In a speech last week, new vice-chair of supervision at the Federal Reserve Michelle Bowman said, “When leverage ratios become the binding capital constraint at an excessive level, they can create market distortions. This is especially true in the case of the enhanced supplementary leverage ratio (eSLR) which is applicable to the largest banks.”

Bowman is also on record criticising overall capital requirements to which US banks are subjected, and has also voiced her support for capital relief trades. The new Trump administration also has a noted deregulatory bias.

This will be welcome to US banks, but those hoping that this in some way will constitute fillip for the growing CRT market in the US will be disappointed; any reduction of the SLR will have only a limited, or no, effect on the US CRT market.

“This only helps CRT if banks wanted to use a reduction of SLR to buy high risk weight assets and then use CRT to reduce risk-based capital requirements.  This will free up risk weight space, but it’s one step removed from the immediate impact of any reform and I’m not sure how much it helps,” says Matt Bisanz, a partner at Mayer Brown and an expert on US banking regulation.

Simon Boughey