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Financial Services Law Insights and Observations

Interagency Final Rule On Regulatory Capital, Revisions To The Supplementary Leverage Ratio

FRB Basel

Consumer Finance

On September 26, the OCC, the FDIC, and the Federal Reserve Board released a final rule that revises the calculation of total leverage exposure to make it more consistent with the January 2014 revisions to the international leverage ratio framework published by the Basel Committee on Banking Supervision. Like the proposed rule, the final rule directs the total leverage exposure calculation to include a bank’s on-balance-sheet assets (less tier 1 capital) and a potential future exposure amount calculated for each derivative contract. The final rule on total leverage exposure differs from the proposed rule in that it: (i) includes in the calculation the amount of cash collateral received for derivative contracts and the notional amount of each credit derivative for which the bank acts as the credit protection provider; (ii) adjusts the treatment of certain repo-style transactions; and (iii) allows the use of the credit conversion factors set forth in the 2013 revised capital rule to calculate some off-balance-sheet exposures. This rule does not apply to community banks. Total leverage exposure is the denominator for the supplementary leverage ratio calculation, which divides a bank’s tier 1 capital against its total leverage exposure. Banks must comply with the new supplementary ratio requirements by January 1, 2018, but they must calculate and publicly report their supplementary ratios beginning January 1, 2015.