Although the new U.S. Basel III rules incorporate a three percent “supplementary” leverage standard for banks and BHCs with assets over $250 billion, the banking agencies are proposing to go farther and mandate a five percent ratio for BHCs with over $700 billion in assets or $10 trillion in assets under management and a six percent ratio for their insured depository subsidiaries (regardless of size), with the agencies also seeking comment on whether all large banks should come under these enhanced supplementary leverage ratios. Both ratios appear to be based on both on- and off-balance sheet assets as measured in the rule, although the insured-depository one could be read to cover only on-balance sheet assets as is now done in the leverage rules covering all banks regardless of size. If finalized, the proposed ratios would cost these “G-SIBs” at least $90 billion in additional capital unless offset by altered asset composition. This is difficult, but possible under the proposed approach. But, if the U.S. adopts the calculation for the leverage denominator pending in a Basel proposal, the requirement will become considerably more punishing with significant market-composition, financial-intermediation and, perhaps, macroeconomic consequences (i.e., through higher interest rates). Foreign banks doing business in the U.S. through the intermediate holding companies proposed by the FRB would almost surely be required to meet these standards here, with a look back to home-country standards for branches and agencies also raising significant issues for these foreign-bank operations. Non-banks of like size that own insured depositories now exempt from the U.S. risk-based capital (RBC) rules will eventually come under leverage standards in concert with designated non-bank SIFIs. This will reduce competitiveness concerns for large banks, but increase the leverage standards cost and, thus, the overall global competitiveness impact for U.S. firms. However, as made clear by FDIC Vice Chair Hoenig and others who support the proposed approach and still tighter standards perhaps to come, the new rules could also enhance financial-market stability, perhaps without competitiveness impact if investors prefer lower-risk banking organizations.
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