As anticipated, the FRB, OCC, and FDIC today affirmed a tough new leverage rule for the largest U.S. banking organizations and laid the groundwork also for conforming this standard to the Basel final approach to setting its denominator (see FSM Report LEVERAGE4). In this report, we provide our initial analysis of these rules and others addressed by the regulators, noting also key decision points and concerns during the meetings on them. With four years to come up with the $68 billion shortfall regulators have calculated, covered U.S. banks may well have time to comply, but rapid adjustments in the stress tests and market demands will, FedFin notes, likely make the rule a de facto requirement even as comments proceed on the revised leverage denominator. Significant shifts in asset holdings at covered banks and the competitive landscape in areas like securities financing and corporate finance will, we believe, ensue and we will also forecast these developments in subsequent in-depth reports. The FRB addressed these issues in detail at its meeting, with staff telling the board that only relatively minor changes such as trade compression for derivatives will be required to offset potential adverse business consequences. Gov. Tarullo said the leverage ratio would cease to be a binding constraint once the pending risk-based surcharge – which will take runnable deposits into account – is implemented. Gov. Stein expressed more worries about regulatory arbitrage than his colleagues, with Chair Yellen agreeing that this issue must be monitored even as all voted in favor of both the final and proposed rule.

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