The FDIC today gave grudging approval to the new, final U.S. Basel III rules (see Client Report CAPITAL197), issuing them as an interim final rule (IFR) so that the proposed new leverage standard could be incorporated into a single final rule as quickly as possible. This approach reflects strong advocacy from Vice Chairman Hoenig, although he still voted against the IFR on grounds that it remains too weak and models-dependent. The leverage standard would impose a five percent on/off-balance sheet requirement on the eight largest U.S. BHCs, as well as a six percent requirement for their insured-depository subsidiaries. FedFin would note that this requirement does not incorporate the G-SIB surcharge applicable to these banks, meaning that they could come under still higher leverage surcharges down the road. We will review the denominator in this leverage standard to determine the extent to which it covers an array of assets now not captured in GAAP; initial FDIC analyses today suggested that the denominator tracks the leverage standard in the final rule but nevertheless increases the effective ratio by approximately 43 percent. Clients are advised that cash and similar assets are in the current leverage ratio and retained in the IFR and proposed higher standards. We expect the denominator to change to a more IFRS-based approach once the Basel leverage “template” is finalized. Leverage standards this high will prove a challenge for the nation’s largest banks – Mr. Hoenig’s goal – as well as one for the biggest foreign banks which FedFin anticipates will also come under the final U.S. approach for much of their U.S. operations. The full report is available to retainer clients. To find out how you can sign up for the service, click here