The federal bank regulatory agencies issued a request for information (RFI) on a proposal to modify certain regulatory capital standards to encourage banking organizations to engage in lower-risk activities and help U.S. Treasury markets run more smoothly.
Banking organizations are subject to both risk-based and leverage capital requirements, which vary based on an institution’s individual exposures.
The proposal would modify certain leverage capital standards applicable to the largest and most systemically important banking organizations, positioning them to act as a backstop to risk-based capital requirements while not discouraging these institutions from engaging in low-risk activities.
“In particular, the proposal would set the enhanced supplementary leverage ratio for both bank holding companies and their depository institution subsidiaries so that it is based on a banking organization’s overall systemic risk,” the agencies (Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency) wrote in a joint statement announcing the RFI.
By introducing policies that, for example, impose lower capital requirements on a Treasury security with lower risk than on a corporate bond with higher risk, the agencies hope to make such low-risk options more appealing.
“Leverage capital requirements, by design, treat all exposures equally,” the agencies. “A leverage capital requirement that is generally higher than risk-based capital requirements can discourage banking organizations from engaging in low-risk activities, such as U.S. Treasury market intermediation.”
The agencies said they do not anticipate significant changes in the amount of overall capital maintained by banking organizations as a result of this proposal. In aggregate, the proposal would reduce tier 1 capital standards for affected bank holding companies by less than 2 percent.
While certain depository institution subsidiaries could see greater reductions, that capital generally would not be available for distribution to external shareholders, given the restrictions that apply at the bank holding company level, the agencies explained.
The proposal would also make conforming changes to other regulations that are tied to the enhanced supplementary leverage ratio, such as total loss-absorbing capacity and long-term debt requirements.
Interested parties will be able to submit comments on the proposal until Aug. 26.