The use of explicit, numerical minimum leverage ratios as part of the capital regulation of insured depository institutions and bank holding companies (BHCs) and their broker-dealer subsidiaries has a long history in the United States, dating back to 1981, but in recent years the scope of their use has broadened considerably as many large broker-dealers were not subsidiaries of BHCs prior to the financial crisis.17 The U.S. intermediate holding company (IHC) operations of foreign banking organizations including their broker-dealers will also be subject to the leverage ratio requirements starting on January 1, 2018. Finally, reflecting the lessons learned during the financial crisis and recognizing that excessive leverage could be built up from off-balance-sheet exposures, the leverage exposure definition was expanded to include off-balance sheet exposures. This new leverage ratio is called the supplementary leverage ratio and applies to the largest U.S. institutions.18 Balance sheet costs tend to make it more expensive for financial institutions to act as intermediaries in money markets.19 If these costs are economically large in the context of the ultra-low-risk, ultra-low-margin world of money markets, this could operate to reduce dealers’ incentive to make markets and act as financial intermediaries, so long as the leverage ratio is the binding capital requirement relative to the risk-based capital requirement for such firms.20, 21 In calculating the leverage ratio, all assets, including cash held at the central bank, are included. Because of the large outstanding stock of reserves in the system, this might have the effect of making the leverage ratio more binding for some firms.

16 The U.S. regulatory capital rules include two leverage ratios: the tier 1 leverage ratio and the supplementary  leverage ratio (SLR). The tier 1 leverage ratio applies to all banking organizations subject to the regulatory capital rules. It is measured as tier 1 capital divided by weekly or daily average total consolidated assets. The minimum tier 1 leverage ratio requirement is 4 percent and is currently in effect. The SLR is effective January 1, 2018 with public disclosure requirement in effect starting in January 1, 2015, and will apply only to “advanced approaches banking organizations” That are defined as those with at least $ billion in total consolidated assets or at least $ billion in consolidated on-balance sheet foreign exposures. It will be measured as tier 1 capital divided by total leverage exposure, which equals the daily average of total consolidated assets plus month-end average of certain off-balance-sheet exposures. The minimum SLR requirement will be 3 percent. In addition, there will be an enhanced SLR requirement applicable to U.S. top-tier bank holding companies identified as globally systemically important banking organizations (G-SIBs). The enhanced requirement consists of a 2 percent leverage buffer above the minimum SLR requirement, for a total of 5 percent. 17 Burhouse, Feid, French and Ligon, “Basel and the Evolution of Capital Regulation: Moving Forward, Looking  Back,” January 14, 2003. 18 Other financial regulations, such as the G-SIB surcharge and the FDIC assessment fee, have similar economic  effects.