Supplementary Leverage Ratio Standards: An Update
April 22, 2014
On April 8, 2014, the Federal Reserve Board, the Federal Deposit Insurance Corporation and theOffice of the Comptroller of the Currency approved standards for the supplementary leverage
ratio (“SLR”), consisting of three parts:•Final rules on the enhanced SLR for the largest U.S. top-tier bank holding companies
and their insured depository institution subsidiaries;•Proposed rules modifying the definition of “total leverage exposure” (the denominatorof the SLR) for all advanced approaches banking organizations; 1 and•

Proposed rules revising the definition of “eligible guarantee” for the mitigation of credit
risk exposure under the advanced approaches risk-based capital rules.

These standards supplement and revise the banking agencies’ final rules from July 2013
implementing capital standards under Basel III and the Dodd-Frank Act. 2
A.

THE ENHANCED SLR FOR THE EIGHT U.S. GLOBALLY SYSTEMICALLYIMPORTANT BANKS

The final rules implement an “enhanced” SLR for any U.S. top-tier bank holding company withmore than $700 billion in total consolidated assets (as reported on its most recent FR Y-9C filing)or more than $10 trillion in assets under custody (as reported on its most recent FR Y-15 filing)
and its insured depository institution subsidiaries. Under these criteria, there are currently
eight U.S. bank holding companies covered by the final rules, all of which have been designatedas globally systemically important banks based on methodology endorsed by the BaselCommittee on Banking Supervision. 31

Advanced approaches banking organizations are generally bank holding companies, savings andloan holding companies, and insured depository institutions with consolidated total assets of atleast $250 billion or consolidated total on-balance sheet foreign exposures of at least $10 billion.
They also include banking organizations that, while not meeting such thresholds, have elected touse the advanced approaches methodology to calculate their risk-weighted assets or are
subsidiaries of advanced approaches banking organizations.

2For a summary of the July 2013 capital rules, please see our memorandum titled, “FederalReserve Adopts Final U.S. Bank Capital Standards Under Basel III,” dated July 8, 2013, available at
http://www.stblaw.com/about-us/news/details?id=55abe6b4-d81a-4e3c-9cb4-7fd02835c9eb.

3The eight U.S. covered institutions are Bank of America, The Bank of New York Mellon,Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, and Wells Fargo. See
Financial Stability Board, 2013 Update of Group of Global Systemically Important Banks (G-SIBs)(Nov. 11, 2013), available at http://www.financialstabilityboard.org/publications/r_131111.pdf.

Memorandum – April 22, 2014

The enhanced SLR is intended to address U.S. concerns, including those expressed by Federal
Reserve Board Governor Daniel K. Tarullo last year, 4 over the adequacy of the 3% minimum
SLR for global institutions under the international Basel III accord. In general, the final rules
require that a covered bank holding company must have an enhanced SLR exceeding 5%—comprised of the 3% minimum SLR applicable to all advanced approaches banking
organizations and an additional 2% leverage buffer—to avoid limitations on capital
distributions and discretionary bonus payments. 5 Restrictions on distributions or bonus
payments are based on a sliding scale depending on the institution’s SLR calculated as of thelast day of the previous calendar quarter:
Leverage Buffer Above 3% Minimum SLRMaximum Leverage Payout Ratio> 2.0%

No limitation

2.0% > X > 1.5%60%

1.5% > X > 1.0%40%

1.0% > X > 0.5%

20%

< 0.5%0%

The maximum leverage payout ratio is the percentage of eligible retained income 6 that acovered bank holding company may pay out, or create an obligation to pay out, in capital
distributions and discretionary bonus payments for the current quarter.
Additionally, any insured depository institution subsidiary of a covered bank holding company
must have an SLR of at least 6% to be “well capitalized” under the banking agencies’ prompt
corrective action framework. Under the July 2013 capital rules, all insured depository
institutions subject to the advanced approaches risk-based capital rules must have an SLR of atleast 3% to be “adequately capitalized.”

4Daniel K. Tarullo, Evaluating Progress in Regulatory Reforms to Promote Financial Stability (May 3,2013), available at http://www.federalreserve.gov/newsevents/speech/tarullo20130503a.htm;
Opening
Statementat
Open
BoardMeeting(July2,2013),
availableat
http://www.federalreserve.gov/newsevents/press/bcreg/tarullo20130702a.htm.

5

The SLR is calculated by dividing a banking organization’s Tier 1 capital by its total leverage
exposure. The term “total leverage exposure” incorporates, among other things, the notionalamount of certain off-balance sheet exposures (such as 10% of the notional amount of
unconditionally cancellable commitments made by the banking organization and the potential
future exposure amount for derivative contracts) in addition to on-balance sheet assets.

6Eligible retained income is a banking organization’s net income (as reported in the banking
organization’s quarterly regulatory reports) for the four calendar quarters preceding the current
calendar quarter, net of any capital distributions and associated tax effects not already reflectedin net income.
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Memorandum – April 22, 2014

Consistent with the minimum SLR under the July 2013 capital rules, the enhanced SLR will takeeffect beginning January 1, 2018. 7B.

REVISED SLR STANDARDS FOR ADVANCED APPROACHES INSTITUTIONS

The banking agencies also issued proposed rules applicable to all advanced approaches
institutions that revise the definition of “total leverage exposure” (the denominator of the SLR),
and require disclosure of the SLR in a common format. The proposed rules would conform U.S.
capital rules to revised Basel III leverage ratio standards that the Basel Committee finalized inJanuary 2014, 8 subsequent to the banking agencies’ release of the July 2013 capital rules.
Under the July 2013 capital rules, the SLR for a reporting quarter is calculated as the average ofthree month-end balances of the SLR. The proposed rules would change that methodology tocalculate (i) Tier 1 capital as of the last day of each reporting quarter, which is consistent withthe generally applicable leverage ratio, and (ii) total leverage exposure as the arithmetic mean of
the total leverage exposure for each day of the reporting quarter. In the preamble to theproposed rules, the banking agencies noted that the move to a daily average of total leverage
exposure is intended to limit the ability of banking organizations to artificially increase their
SLR by temporarily inflating their balance sheet assets at the end of a reporting quarter by, forexample, receiving a large inflow of deposits.
The proposed rules would also make a number of changes to the exposures included in total
leverage exposure, including, among other changes:•Sold Credit Protection—The notional principal amount of a sold credit derivative would
be included in total leverage exposure, but may be reduced, subject to certain conditions,by any reduction in fair value recognized in common equity Tier 1 capital and by thenotional amount of any purchased credit protection on the same reference name with anequal or greater maturity.

•Credit Conversion Factors—Standard risk-based capital credit conversion factors, rather
than a uniform 100% credit conversion factor as under the July 2013 capital rules, would
be applied to off-balance sheet items.

•Cash Variation Margin—The exposure amount of a derivative contract may only bereduced by the amount of cash collateral received from counterparties if the cash
variation margin satisfies certain requirements. Under the July 2013 capital rules, theexposure amount of a derivative is the GAAP carrying value, which may reflect a morelenient netting of cash variation margin than the proposed rules.

7Although SLR and enhanced SLR compliance does not commence until 2018, all advanced
approaches banking organizations are required to calculate and report their ratios in the firstquarter of 2015. As noted in Section B of this memorandum, SLR-related disclosure is expected tobe made on a common template.

8

Basel Committee, Basel III Leverage Ratio Framework and Disclosure Requirements (Jan. 2014),
available at http://www.bis.org/publ/bcbs270.htm.
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Memorandum – April 22, 2014

•Repo-style Transactions—The exposure amount of a repo-style transaction, defined as arepurchase or reverse repurchase transaction or a securities borrowing or securities
lending transaction, which under the July 2013 capital rules was the GAAP balance sheet
carrying value of such exposure (including all offsets to such exposure), may only reflect
the GAAP option to offset certain gross accounting assets by the amount of payments
due to a counterparty under certain specified circumstances. A securities lender would
also be allowed to adjust its on-balance sheet assets in security-for-security transactions
when it does not re-hypothecate or resell securities received as collateral. Additionally,total leverage exposure would include a measure of counterparty credit risk.

The proposed rules would require disclosure of the SLR beginning January 1, 2015, using a newcommon disclosure template adopted by the Basel Committee.
C.

REVISED DEFINITION OF ELIGIBLE GUARANTEE

The banking agencies also adopted proposed rules that would revise the definition of “eligibleguarantee” for purposes of the advanced approaches risk-based capital rules, which allow abanking organization to mitigate its credit risk exposure with an eligible guarantee. The
proposed rules would remove the July 2013 capital rules’ requirement that an eligible guarantee
be provided by an eligible guarantor 9 for exposures that are not securitizations. Accordingly,
the proposed rules would allow banking organizations to more easily mitigate credit risk
exposures by obtaining guarantees from guarantors that do not qualify as eligible guarantors.
***

For more information, please contact any of the members of our Financial Institutions Group, aslisted below.
Lee Meyerson(212) 455-3675
lmeyerson@stblaw.com

Maripat Alpuche(212) 455-3971
malpuche@stblaw.com

Mark Chorazak(212) 455-7613
mchorazak@stblaw.com

Randy Benjenk(212) 455-2307
randy.benjenk@stblaw.com

The contents of this publication are for informational purposes only. Neither this publication nor thelawyers who authored it are rendering legal or other professional advice or opinions on specific facts ormatters, nor does the distribution of this publication to any person constitute the establishment of anattorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection with theuse of this publication.

9Eligible guarantors include sovereigns, certain international organizations, certain U.S.
government-sponsored entities, banking organizations, qualifying central counterparties, andqualifying entities with investment grade unsecured debt outstanding.
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Memorandum – April 22, 2014

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