U.S. Leverage-Ratio Denominator
As the House and Senate advance legislation to exempt certain custody bank central-bank reserve assets from the leverage ratio (LR),1 a new exemption – this time for certain client initial margin accounts – has been introduced in the House. More limited than other LR-relief proposals, the legislation would nonetheless facilitate large-bank support for clearing clients, enhancing the transition to CCPs, promoting market liquidity, and increasing client hedging. However, the LR exemption would expand policy-driven exceptions to what is intended as a risk-neutral capital requirement along with heightening the role of Congress in stipulating regulatory-capital standards to achieve policy objectives that may or may not reflect actual credit risk.