FRB Immediately, but Temporarily, Eases Supplementary Leverage Ratio
The Federal Reserve Board ("FRB") adopted, on an emergency and immediate basis, a rule temporarily amending the calculation of total leverage exposure within the supplementary leverage ratio of the FRB's regulatory capital rule in a manner that will allow bank holding companies to increase their leverage by excluding from the denominator of the ratio (i) Treasuries and (ii) deposits at Federal Reserve Banks. As the FRB noted in the adopting release, both of these types of assets "are free of credit risk [so] their exclusion [from the ratio] will also not incentivize risk-taking by banking organizations." (at page 11)
In adopting the rule, the FRB noted one of the contributing factors was that one of the effects of the crisis had been a large increase in banks' holdings of risk-free assets. For example, as investors liquidated securities and deposited the cash proceeds of their sales in banks that redeposited that case with a Federal Reserve Bank, the denominator of the SLR was substantially increased, even though the banks had not actually taken on more risk. The FRB further noted that including Treasuries in the denominator of SLR discouraged dealers from holding Treasury securities and thus had the potential to impede the smooth functioning of the Treasury market.
In light of the emergency nature of the rule change and the need to stimulate economic activity, the FRB is issuing the temporary rule without prior notice or prior opportunity for comment. (Comments on the interim final rule can however be submitted within 45 days following its publication in the Federal Register, and the Board did specifically request the public to provide comments). The rule change will remain effective until March 31, 2021.
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