New Banking Rule Could Free Up $55B Amid Pandemic

By Al Barbarino
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Law360 (May 18, 2020, 4:11 PM EDT) -- Bank regulators have issued temporary relief aimed at expanding the lending capacity of the largest U.S. banks during the COVID-19 pandemic, noting that the changes to supplementary leverage ratio calculations could temporarily reduce banks' regulatory capital requirements by as much as $55 billion.

The new final interim rule allows depository institutions with more than $250 billion in total consolidated assets to exclude U.S. Treasury securities and deposits at Federal Reserve banks from the SLR calculations, which would lessen the regulatory capital needed to account for rapidly growing balance sheets, according to a joint statement issued Friday.

The rule will allow more flexibility in order to "provide credit to households and businesses in light of the challenges arising from the coronavirus response," according to the statement from the Fed, the Federal Deposit Insurance Corp. and the Office for the Comptroller of the Currency.

The SLR rules, introduced in 2014 to raise the liquidity requirements of large banks, generally require banks with more than $250 billion in total assets to hold a minimum leverage ratio of 3% with their depository institutions. That jumps to 6% for the so-called global systemically important banks.

Excluding Treasury purchases and deposits with Fed banks from the SLR calculation could lower capital requirements by a total of approximately $55 billion if all eligible banks opt in, the agencies said.

They noted that the changes are needed as banks snap up Treasuries and increase deposits with Fed banks in response to a spike in customers making cash deposits after liquidating assets and drawing down credit lines in response to the pandemic.

"Absent any adjustments to the [ratio], the resulting increase in the size of depository institutions' balance sheets may cause a sudden and significant increase in the regulatory capital needed to meet a depository institution's leverage ratio requirement," the agencies said.

"The ability of depository institutions to hold certain assets, most notably deposits at a Federal Reserve Bank and Treasuries, is essential to market functioning, financial intermediation, and funding market activity, particularly in periods of financial uncertainty."

Jelena Williams, chair of the FDIC, lauded the new rule, noting that the "dramatic deposit inflows since the beginning of March" from customers have increased banks' balance sheets, which could cause "a sudden and significant spike in the regulatory capital needed to meet the SLR requirement."

However, Martin Gruenberg, member of the FDIC's board of directors, voted against the rule, citing the preservation of capital requirements as the best course of action amid a downturn.

"We learned the hard way during the 2008 financial crisis the importance of preserving loss absorbing leverage capital at systemically important banks," he said in a statement. "The capital of U.S. banks may look strong today, but that profile may change drastically over the next 12 months as credit losses mount. This is particularly true given the severity and scope of the current crisis involving extraordinary levels of economic contraction, business closures, job loss, and potential bankruptcies."

Banks that want to opt in will have to request approval from their primary federal banking regulator before making capital distributions, the agencies said. The changes follow a rule announced by the Fed in April that made similar supplementary leverage ratio calculation exceptions for certain bank holding companies.

--Editing by Adam LoBelia.

For a reprint of this article, please contact reprints@law360.com.

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