In a comment letter today, the American Bankers Association expressed support for a proposal by the Federal Reserve and the OCC that would tailor the enhanced supplementary leverage ratio that applies to the eight global systemically important banks. Instead of the current fixed leverage standard, the agencies would apply the ratio to each firm’s risk-based capital surcharge, which itself is based on firm-specific characteristics. ABA also supported conforming changes to the Total Loss Absorbing Capacity requirements.
“[A]s currently calibrated, the ESLR rule creates incentives for banks to reduce participation in lower-risk and lower-return businesses by increasing the costs of participation — pressing against or exceeding the returns from such instruments,” ABA pointed out. “These include instruments such as secured repo financing, central clearing services for market participants, and even taking deposits. The proposed recalibration would operate to alleviate many of these problems based on today’s balance sheets.”
In addition to the current proposal, ABA encouraged the agencies to consider other methods for avoiding potential negative outcomes, including removing riskless assets and activities — such as reserves on deposit at the Federal Reserve — from the leverage ratio calculations for all banks. The association also called for a holistic review of the G-SIB framework, noting that the current framework “does not reflect significant post-crisis reforms including TLAC, capital requirements, liquidity requirements [and] margin requirements.” For more information, contact ABA’s Hugh Carney.