Bank Capital: Supplementary Leverage Ratio

Transcription

1 Bank Capital: Supplementary Leverage Ratio Federal Banking Agencies Propose Revisions to the Supplementary Leverage Ratio s Exposure Measure and Approve Final Rules Implementing an Enhanced Supplementary Leverage Ratio for the Largest U.S. Banking Organizations SUMMARY Last week, the Federal Deposit Insurance Corporation (the FDIC ), the Board of Governors of the Federal Reserve System (the FRB ) and the Office of the Comptroller of the Currency (the OCC and, together with the FDIC and FRB, the Agencies ) took two important actions relating to the new Basel IIIbased supplementary leverage ratio (the SLR ) that the Agencies adopted as part of their July 2013 comprehensive revisions to their regulatory capital rules (the Revised Capital Rules ) 1 applicable to U.S. banking organizations: First, the Agencies approved a notice of proposed rulemaking (the NPR, 2 and the rules set forth therein, the Proposed Rules ) that would revise the definition and scope of the total leverage exposure, which is the denominator of the SLR (and, therefore, also the denominator of the enhanced SLR discussed below). Under the Revised Capital Rules, the SLR is calculated as the ratio of Tier 1 capital to total leverage exposure and, when it becomes effective on January 1, 2018, will apply only to advanced approaches banking organizations that is, those with $250 billion or more in total consolidated assets or $10 billion or more in foreign exposures. 3 In June 2013, the Basel Committee on Banking Supervision (the BCBS ) proposed revisions to the denominator of the Basel III leverage ratio (defined in Basel III as the exposure measure ) 4 and, in January 2014, adopted final revisions to the Basel III leverage ratio s exposure measure (the BCBS 2014 Revisions ). 5 The Proposed Rules are largely consistent with the BCBS 2014 Revisions and, for most (and perhaps all) affected banking organizations, will increase the total leverage exposure in their SLR calculations and reduce the resulting SLR percentage. Second, the Agencies approved final rules (the Final Rules ) that effectively would increase the SLR s normal 3 percent minimum SLR standard to 5 percent for bank holding companies with total New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 consolidated assets of more than $700 billion or assets under custody of more than $10 trillion, and 6 percent for their insured depository institution subsidiaries. As such, this enhanced SLR (referred to by the Agencies as the eslr ) applies to the eight U.S. banking organizations that the Financial Stability Board has identified as global systemically important banks using the methodology developed by the BCBS (the G-SIB BHCs ). 6 The Final Rules do not change the 3 percent minimum required SLR for G-SIB BHCs and their insured depository institution subsidiaries but instead apply: a 2 percent buffer for G-SIB BHCs as an add-on to the Revised Capital Rules 3 percent minimum required SLR, implemented in a manner similar to the capital conservation buffer with increasing limitations on dividends and other capital distributions and discretionary bonus payments as a G-SIB BHC s SLR falls below 5 percent and into its buffer zone; and a 6 percent eslr standard for depository institution subsidiaries of G-SIB BHCs as one of the required standards for well capitalized status under the Agencies prompt corrective action rules. The Final Rules were adopted largely unchanged from an eslr proposal published for comment by the Agencies in August 2013 (the eslr Proposal ). Banking organizations and other industry participants, in their comments last year on the eslr Proposal that became the Final Rules, urged the Agencies not to re-calibrate the SLR for any category of U.S. banking organizations (whether G-SIB BHCs or otherwise) until the BCBS finalized any proposed changes in the Basel III-based leverage ratio (which it did in the BCBS 2014 Revisions) and the Agencies determined whether and how the total exposure measure under the Revised Capital Rules Liquidity Coverage Ratio ( LCR ) 7 would be modified in connection with the Basel III changes. Notwithstanding the apparent linkage between the SLR s calibration and the calculation of the total exposure measure for its denominator, the Agencies determined in the Final Rules to proceed with re-calibration for G-SIB BHCs as embodied in the eslr without first finalizing changes to the total exposure measure. The Agencies noted in the NPR that they seek comment on all aspects of the Proposed Rules, including interactions with the Final Rules eslr standard. The comment period for the Proposed Rules expires on June 13, G-SIB BHCs and their subsidiary insured depository institutions will be required to comply with the Final Rules eslr requirement starting on January 1, 2018, the same effective date as the SLR for other affected institutions under the Revised Capital Rules. The SLR is discussed in our memorandum to clients dated July 3, 2013, relating to the Revised Capital Rules, 8 and the eslr is described in our memorandum to clients dated July 11, 2013, relating to the eslr Proposal. 9 Only those aspects of the SLR that have been modified in significant ways from the Revised Capital Rules and other noteworthy observations with respect to the Final Rules eslr requirement are discussed in this memorandum. PROPOSED RULES The Proposed Rules would, among other things, make important changes to the calculation of derivative exposures and repo-style transactions as components of the total exposure measure, conform the credit -2-

3 conversion factors ( CCFs ) used for SLR purposes to the CCFs used in the Revised Capital Rules standardized approach, and change the calculation methodology for the SLR in certain respects. Each of these changes is described further below. A. DERIVATIVE EXPOSURES Treatment of cash variation margin. The Proposed Rules continue to include in total leverage exposure the carrying value, if any, of derivative contracts on a banking organization s balance sheet. In some cases, GAAP allows the carrying value to reflect a netting of cash variation margin received against gross derivative assets. The Proposed Rules would specify the conditions for cash collateral received from and posted to a counterparty to a derivative contract (that is, cash variation margin) to not be included in the organization s total leverage exposure. A banking organization may use cash variation margin to reduce only the current credit exposure amount (that is, the replacement cost), but not the potential future exposure ( PFE ) of a derivative contract, if all of the following conditions are met: for derivative contracts not cleared through a qualifying central counterparty, the cash received by the counterparty is not segregated; the variation margin is calculated and transferred on a daily basis based on the mark-to-fair value valuation of the derivative contract; the variation margin would fully extinguish the net current credit exposure to the counterparty of the derivative contract, subject to applicable threshold and minimum transfer amounts; the cash variation margin is in the form of cash in the same currency as the currency of settlement of the derivative contract; 10 and the derivative contract and variation margin are governed by a qualifying master netting agreement between the counterparties to the derivative contract or by the governing rules for a cleared transaction, which in each case must explicitly stipulate that the counterparties agree to settle any payment obligations on a net basis, taking into account any variation margin received or provided under the contract if a credit event involving either counterparty occurs. Although these proposed conditions are generally similar to the criteria for the GAAP offset noted above, they may result in a stricter treatment of some derivative transactions as compared to GAAP because the Proposed Rules conditions, as the Agencies note in the NPR, have been developed to ensure that only cash that, in substance, is a form of pre-settlement payment in a derivative contract may reduce the assets amount for purposes of total leverage exposure. 11 The NPR solicits views on the differences between the proposed criteria and GAAP treatment, including views on an alternative approach for cash collateral transferred in derivative transactions that would use only the GAAP offset for purposes of taking such collateral into account for total leverage exposure. Credit derivative exposures. Under the Revised Capital Rules, credit derivatives are treated in the same manner as other derivative contracts for purposes of determining total leverage exposure (that is, the exposure is calculated using the so-called current exposure methodology ( CEM )), which captures -3-

4 only the counterparty credit risk arising from the creditworthiness of the counterparty. A banking organization that provides credit protection in the form of a credit derivative agrees to assume the credit risk of the reference exposure, thus exposing it to the credit risk of the underlying reference exposure in addition to that associated with the counterparty. To account for this additional exposure, the Proposed Rules would require a banking organization to include in total leverage exposure the effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the derivative contract) of sold credit protection. Banking organizations, however, would be permitted to reduce the effective notional principal amount of sold credit protection by any reduction in the mark-to-fair value that has been recognized in common equity Tier 1 capital, thus appearing to effectively cap the exposure from the sold credit protection at the maximum potential loss. The Proposed Rules also would permit a banking organization to further reduce the effective notional principal amount of sold credit protection by the effective notional principal amount of purchased credit protection, provided the remaining maturity of the purchased credit protection is at least equal to the remaining maturity of the sold credit protection and the following additional criteria are satisfied: for single-name credit derivatives, the reference exposure of the purchased credit protection would need to refer to the same legal entity and rank pari passu with, or be junior to, the underlying reference exposure of the sold credit protection (but, if junior, only if a credit event on the senior reference asset would result in a credit event on the subordinated reference asset); and for tranched products, the reference exposure of the purchased credit protection would need to refer to the same legal entities and rank pari passu with the underlying reference exposures of the sold credit protection, and the level of seniority of the purchased credit protection would need to rank pari passu with that of the sold credit protection. A banking organization that reduces the effective notional principal amount of sold credit protection by (i) a reduction in the mark-to-fair value of the sold credit protection recognized in common equity Tier 1 capital and (ii) purchased credit protection as discussed above, would be required under the Proposed Rules also to reduce the effective notional amount of the purchased credit protection by the amount of any increase in the mark-to-fair value of the purchased credit protection that is recognized in common equity Tier 1 capital. In addition, if a banking organization purchases credit protection through a total return swap and records the net payments received as net income but does not record offsetting deterioration in the mark-to-fair value of the sold credit protection in common equity Tier 1 capital, the banking organization would not be permitted to reduce the effective notional principal amount of the sold credit protection. As sold credit protection in the form of credit derivatives is included in total leverage exposure through the effective notional principal amount, current credit exposure and PFE, the Proposed Rules also allow a banking organization to adjust the PFE of sold credit derivatives to avoid double-counting of the notional amounts of these exposures. A banking organization that elects to adjust the PFE for sold credit derivatives would be required to do so consistently over time. -4-

5 Central clearing of derivatives transactions. The Proposed Rules clarify in certain respects the treatment of a cleared transaction on behalf of a clearing member client (a client-cleared transaction ). Where a banking organization is acting as the clearing member in a client-cleared transaction and guarantees the clearing member client s performance to the central counterparty (the CCP ), the clearing member banking organization would include the guaranteed amount (that is, the clearing member client s obligations to the CCP assumed by the banking organization on the client s default) in its total leverage exposure. Likewise, where a clearing member banking organization guarantees the performance of the CCP to the clearing member client, the clearing member banking organization would include an exposure to the CCP for the client-cleared transaction in its total leverage exposure. -5- The Proposed Rules, however, would not require the clearing member banking organization to include in its total leverage exposure its exposure to the CCP where the banking organization does not guarantee the CCP s performance to the client because, as the NPR notes, including such exposure generally would overstate the clearing member banking organization s total leverage exposure. 12 B. REPO-STYLE TRANSACTIONS Under the Revised Capital Rules, total leverage exposure includes the on-balance sheet carrying value of repo-style transactions, but not any related off-balance sheet exposures. That on-balance sheet carrying value may reflect the option under GAAP to offset the gross values of receivables due from a counterparty under reverse repurchase agreements by the amount of the payments due to the counterparty (that is, amounts recognized as payables to the same counterparty under repurchase agreements) if certain applicable accounting criteria are met (the GAAP Repo Offset ). The Proposed Rules make five changes to the measurement of repo-style transactions that continue to measure them in a manner largely consistent with GAAP but may require some banking organizations to increase exposure amounts for these transactions compared to GAAP assets. Counterparty criteria. Under the Proposed Rules, where a banking organization acts as a principal in a repo-style transaction, it generally would include in total leverage exposure the amount of any on-balance sheet assets recognized for the repo-style transaction (that is, after taking into account the GAAP Repo Offset). However, the banking organization would be required to replace the on-balance sheet assets for those repo-style transactions with the gross value of receivables associated with those repo-style transactions (that is, reverse the GAAP Repo Offset) in calculating its total leverage exposure unless all of the following criteria are met: the transactions have the same explicit final settlement date; the right to offset the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable both currently in the normal course of business and in the event of receivership, insolvency, liquidation or similar proceeding; and the counterparties intend to settle net or settle simultaneously, or the transactions are subject to a settlement mechanism that results in the functional equivalent of net settlement such that the cash flows of the transactions are equivalent to a single net amount on the settlement date. To meet the

6 functional equivalent requirement, both transactions are settled through the same settlement system, and the settlement arrangements are supported by cash or intraday credit facilities intended to ensure that settlement of both transactions will occur by the end of the business day and the settlement of the underlying securities does not interfere with the net cash settlement. In other words, if a banking organization enters into repurchase and reverse repurchase transactions with the same counterparty and applies the GAAP Repo Offset but does not meet the criteria detailed above, the banking organization would be required to replace the on-balance sheet assets of the reverse repurchase transactions with the gross value of receivables for those reverse repurchase transactions. The Agencies acknowledge in the NPR that, based on their supervisory experience, these proposed criteria would result in repo-style transaction amounts in total leverage exposure that are somewhat greater than the on-balance sheet amounts and, as a result, would increase the regulatory capital requirement for such transactions. 13 The NPR solicits views on the operational implications of the proposed criteria compared to GAAP as well as necessary system-development costs. Collateral securities. In a security-for-security repo-style transaction, the Proposed Rules would allow a security lender to exclude from total leverage exposure the security received as collateral where the securities lender does not use the security to further leverage itself (that is, it does not re-hypothecate or sell the security). Where the securities lender sells or re-hypothecates the security, the securities lender would include the amount of cash received or the value of the security pledged as collateral in its total leverage exposure. At the same time, a securities borrower would include the security transferred to a securities lender in total leverage exposure but would not include the security borrowed. Counterparty credit risk. The Proposed Rules also would include a counterparty credit risk measure in total leverage exposure to capture a banking organization s exposure to the counterparty in repo-style transactions, including transactions in which a banking organization acts as an agent for a customer and indemnifies the customer against loss. The measure would be calculated as the difference between the fair value of the instruments, gold and cash received from a counterparty and the fair value of the instruments, gold and cash lent to the counterparty. If the repo-style transaction is not subject to a qualifying master netting agreement or is not a cleared transaction, the counterparty exposure measure would be calculated on a transaction-by-transaction basis. However, if there is a qualifying master netting agreement in place or it is a cleared transaction, the banking organization may net the total fair value of instruments, gold and cash lent to the counterparty against the total fair value of instruments, gold and cash received from the counterparty for those transactions. Banking organization as agent. The Proposed Rules also specify the measure of exposure for repostyle transactions where a banking organization acts as an agent and has limited exposure to its counterparties. If a banking organization acting as an agent for a repo-style transaction (i) provides a guarantee to a customer with regard to the performance of the customer s counterparty and (ii) the guarantee is not limited to (that is, is greater in value than) the difference between the fair value of the -6-

7 security or cash lent and the fair value of the security or cash borrowed, the banking organization would include in its total leverage exposure the amount of the guarantee greater than that difference. Accounting sales treatment. The Proposed Rules would require a banking organization to add to its total leverage exposure the value of securities it sells under a repo-style transaction, if the transaction is treated as a sale for accounting purposes. The addition would be required for so long as the repo-style arrangement is outstanding. The NPR acknowledges that these repo-style arrangements are not common in the United States but that the modification is consistent with the BCBS 2014 Revisions and intended to capture a banking organization s economic exposure, even if an accounting sales treatment is achieved, in cases when the banking organization may have future contractual obligations arising under the repo-style arrangement. 14 C. OFF-BALANCE SHEET EXPOSURES The Proposed Rules would use the graduated CCFs used by the Revised Capital Rules so-called standardized approach for converting off-balance sheet obligations into risk-weighted assets to calculate the total leverage exposure arising from the exposure of off-balance sheet items rather than the uniform 100 percent CCF currently required, except for unconditionally cancellable commitments, which continue to be subject to a 10 percent CCF to ensure that all unfunded commitments are included in a banking organization s total leverage exposure. 15 This is a welcome modification in the face of sharp criticism from many commenters that the fixed 100 percent CCF for all off-balance sheet items bears no relationship to accurate measurements of off-balance sheet exposures, particularly with respect to committed lines of credit. Indeed, the NPR states that a uniform 100 percent CCF likely overstates the relative magnitude of the effective economic exposure created by most off-balance sheet exposures. 16 The other applicable CCFs are as follows: 20 percent for commitments that are not unconditionally cancellable with an original maturity of up to one year and 50 percent for those with an original maturity of over one year; 20 percent for short-term, self-liquidating, trade-related contingent items arising from the movement of goods; 50 percent for transaction-related contingent items, including performance bonds, bid bonds, warranties and performance standby letters of credit; 100 percent for direct credit substitutes (for example, guarantees and financial standby letters of credit) and credit-enhancing representations and warranties that are not securitization exposures; and 100 percent for forward agreements, repurchase agreements, and off-balance sheet securities lending and borrowing transactions. 17 D. CALCULATION METHODOLOGY The Revised Capital Rules define the SLR as the arithmetic mean of the ratio of Tier 1 capital to total leverage exposure calculated as of the last day of each month in the reporting quarter. The Proposed Rules would modify the calculation of both the numerator and denominator. Under the Proposed Rules, -7-

8 Tier 1 capital would be calculated as of the last day of each reporting quarter, consistent with the calculation of Tier 1 capital as the numerator of the Agencies generally applicable leverage ratio. As a result, if adopted, this modification would allow banking organizations to use the same Tier 1 calculation for all their leverage ratio calculations under the Revised Capital Rules. However, total leverage exposure would be calculated as the arithmetic mean of the total leverage exposure calculated for each day of the reporting quarter. These modifications respond to criticism of the Revised Capital Rules use for SLR purposes of an average of the three month-end balances of a reporting quarter because sudden deposit inflows at the end of reporting periods or during times of financial stress could cause a temporary increase in balance sheet assets and lead to artificial and temporary increases in a banking organization s SLR at the end of a reporting period. Nonetheless, despite commenters suggestion that daily averaging be an option for banking organizations with the operational capacity and not a requirement applied to all banking organizations subject to the LCR, the proposed changes to the calculation methodology would apply to all banking organizations subject to the SLR (that is, all advanced approaches banking organizations, which includes all G-SIB BHCs and their depository institution subsidiaries). The NPR requests comment on the operational burden of daily averaging of off-balance sheet exposures and whether it would be preferable to have an approach where daily averaging was used just for on-balance sheet exposures and the quarter-end calculation was used for off-balance sheet exposures. E. DISCLOSURE The Agencies regulatory reports currently incorporate quarterly reporting of the SLR under the Revised Capital Rules, effective January 1, Consistent with the BCBS 2014 Revisions, the Proposed Rules would apply additional disclosure requirements for the calculation of the SLR to top-tier advanced approaches banking organizations. Such banking organizations would be required to complete two parts of a template SLR disclosure table. Part 1 of the table would summarize the differences between a banking organization s total consolidated accounting assets reported on published financial statements and regulatory reports and the calculation of total leverage exposure. Part 2 would collect more detailed information on the components of total leverage exposure and would be similar to the version of Schedule A to the Federal Financial Institutions Examination Council reporting form FFIEC 101 that took effect in March The Agencies plan to reconsider the SLR reporting requirements on Schedule A to FFIEC 101 in the future to reflect the Proposed Rules disclosure requirements. CONCLUDING OBSERVATIONS The Proposed Rules and Final Rules raise several important issues, including: Capital planning impact. Under the current capital plan rule 19 and comprehensive capital analysis and review ( CCAR ) program instructions, the FRB considers a G-SIB BHC s ability to maintain capital above each minimum regulatory capital ratio and a common equity Tier 1 capital ratio of 5 percent under -8-

9 expected and stressed conditions throughout the nine-quarter planning horizon in assessing the adequacy of the organization s capital plan and capital distribution requests. Although not explicitly addressed by the Agencies in the Final Rules, FRB staff at the open meeting approving the Final Rules confirmed that the 5 percent eslr (that is, the 3 percent minimum SLR plus the 2 percent buffer) would not serve as the minimum stressed SLR for purposes of the capital plan rule and CCAR in the future (and, more generally, CCAR stress analyses look to compliance with minimum required ratios under stress scenarios, not minimum required ratios plus buffers); rather, the 3 percent minimum SLR would. Further potential revisions. Consistent with the BCBS 2014 Revisions, under the Proposed Rules, exposure for all derivative transactions continues to be measured using the CEM. The BCBS has been evaluating, and on March 31, 2014 published a standard finalizing, a non-internal model method alternative to the CEM for measuring exposure at default for counterparty credit exposures. 20 The BCBS noted in the BCBS 2014 Revisions that, if an alternative to the CEM is adopted, it will consider using the alternative methodology in its Basel III leverage ratio framework. It remains to be seen whether such changes will be pursued by either the BCBS or the Agencies through further revisions to the calculation of the SLR numerator. Additional capital-related initiatives. In FRB Governor Daniel Tarullo s remarks at the FRB s open meeting approving the Final Rules and NPR, he noted that the need to maintain the traditional relationship between the risk-based capital and leverage ratios (that is, that the leverage ratio serve as a critical backstop to the risk-based capital requirements) and to avoid unintended consequences of the eslr skewing the incentives of the largest financial firms if it becomes the binding capital requirement in non-stress times highlights the necessity of two additional capital-related initiatives. 21 Specifically, he indicated that this reinforces the importance of going forward as [the FRB] will with capital surcharges on G-SIB BHCs and provides a little bit of reinforcement to an additional capital charge on large banking organizations that would directly address risk related to short-term wholesale funding. 22 Both of these concepts have been outlined in recent speeches by Governor Tarullo, among other FRB Board members. 23 FRB Governor Jeremy Stein echoed Governor Tarullo s call for a capital charge based on some measure of short-term wholesale funding, confessing to some misgivings on the Final Rules and NPR and noting that it is possible to go too far with the eslr if it gets to a point where it is no longer a backstop but rather binding or near binding. 24 Governor Stein also noted the possibility for arbitrage among banking organizations, or changes in lines of business, as a result of the eslr being more binding for some banking organizations than for others and concluded his remarks by stating he hopes the FRB will remain attentive to these possible unintended consequences and be prepared to adjust if necessary. 25 Capital impact. The NPR seeks comment on the regulatory capital impact of the Proposed Rules. In discussing the NPR s quantitative impact, the Agencies highlight as the most important changes to total -9-

10 leverage exposure from the Revised Capital Rules (i) the use of standardized CCFs for certain offbalance sheet activities, which should lead to a reduction in total leverage exposure compared to the Revised Capital Rules and (ii) the proposed inclusion of the effective notional principal amount in the exposure amount calculated for sold credit derivatives, which should lead to an increase in total leverage exposure compared to the Revised Capital Rules. The Agencies note that the impact of the NPR could vary materially from banking organization to banking organization and would be particularly sensitive to the volume of sold credit derivative activities and whether those activities are hedged. On average, the Agencies estimate that the modifications to total leverage exposure in the Proposed Rules would result in an approximate 5.5 percent aggregate increase in total leverage exposure 26 compared to the definition of total leverage exposure in the Revised Capital Rules for all banking organizations that would be subject to the SLR that is, all advanced approaches banking organizations. For the G-SIB BHCs subject to the eslr, the Agencies estimate that increase to be 8.5 percent and that the G-SIB BHCs would have to raise an additional $46 billion in Tier 1 capital to avoid being subject to limits on capital distribution and discretionary bonus payments. Without taking into account the Proposed Rules modifications to total leverage exposure, the Agencies estimate, based on December 2013 CCAR data, that if the eslr requirements of the Final Rules were in effect as of fourth quarter 2013, G-SIB BHCs would have needed to raise over $22 billion in Tier 1 capital. * * * Copyright Sullivan & Cromwell LLP

11 ENDNOTES The FRB and OCC published a joint final rule in the Federal Register on October 11, 2013 (78 Fed. Reg ) and the FDIC published a substantially identical interim final rule on September 10, 2013 (78 Fed. Reg ). For additional information regarding the Revised Capital Rules, see our memorandum to clients titled Bank Capital Rules: Federal Reserve Approves Final Rules Addressing Basel III Implementation and, for All Banks, Substantial Revisions to Basel I-Based Rules, dated July 3, Contemporaneously with the approval of the NPR, the FDIC adopted as final that interim final rule with no substantive changes. See FDIC, Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Riskweighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk- Based Capital Rule, and Market Risk Capital Rule (Apr. 8, 2014). These rulemakings, among other things, implemented the Basel III capital framework for U.S. banking organizations. Agencies, Regulatory Capital Rules: Regulatory Capital, Proposed Revisions to the Supplementary Leverage Ratio (Apr. 8, 2014). Maintaining at least a 3 percent SLR is one of the requirements for advanced approaches banking organizations that are depository institutions to be adequately capitalized for purposes of the Agencies prompt corrective action regime. See BCBS, Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems (Dec and revised in June 2011), available at See BCBS, Revised Basel III Leverage Ratio Framework and Disclosure Requirements (Jan. 2014), available at The modifications to the denominator were originally proposed in a consultative paper that the BCBS published for comment in June See BCBS, Consultative Document: Revised Basel III Leverage Ratio Framework and Disclosure Requirements (June 2013), available at The BCBS has indicated that it will continue to study the Basel III leverage ratio through the implementation phase into 2017 and will consider further modifications to the ratio. The Financial Stability Board and the BCBS published a list of banks in November 2012 that met the BCBS definition of a global systemically important bank based on year-end 2011 data. A revised list based on year-end 2012 data was published November 11, 2013, available at The eight U.S. top-tier bank holding companies that are currently identified as global systemically important banks are: Bank of America Corporation, The Bank of New York Mellon Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corporation and Wells Fargo & Company. In October 2013, the Agencies issued a notice of proposed rulemaking to implement the Basel III LCR, part of the Basel III liquidity framework for banking organizations. See Agencies, Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and Monitoring, 78 Fed. Reg (Nov. 29, 2013); BCBS, Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools (Jan. 2013), available at For additional information about the Agencies LCR notice of proposed rulemaking, see our memorandum to clients titled, Basel III Liquidity Framework: Federal Reserve Issues Basel III Liquidity Coverage Ratio Proposal for Large U.S. Banks, dated October 29, See Bank Capital Rules: Federal Reserve Approves Final Rules Addressing Basel III Implementation and, for All Banks, Substantial Revisions to Basel I-Based Rules, dated July 3, See Bank Leverage Limits: Proposed Enhanced Supplementary Leverage Ratio Would Substantially Increase Leverage Capital Requirements for Certain Systemically Important Bank Holding Companies and Their Insured Depository Institution Subsidiaries, dated July 11,

12 ENDNOTES (CONTINUED) For these purposes, currency of settlement means any currency for settlement specified in the governing qualifying master netting agreement, the credit support annex to the qualifying master netting agreement or the governing rules for a cleared transaction. See Agencies, supra note 2, at 14. See id. at 30. See id. at 24. See id. at See id. at 28. See id. at The off-balance sheet component of repurchase agreements equals the sum of the current fair values of all positions the banking organization has sold subject to repurchase. The off-balance sheet component of off-balance sheet securities lending transactions equals the sum of the current fair values of all positions the banking organization has lent under the transaction. The off-balance sheet component of off-balance sheet securities borrowing transactions equals the sum of the current fair values of all non-cash positions the banking organization has posted as collateral under the transaction. If there are material differences between a banking organization s total consolidated assets as reported in published financial statements and regulatory reports and the on-balance sheet assets reported for purposes of calculating the SLR, the banking organization would be required to disclose and explain the source of the material differences. Additionally, if a banking organization s SLR changes significantly from one reporting period to another, the banking organization would be required to explain the key drivers of the material changes. 12 C.F.R See BCBS, Consultative Document: The Non-Internal Model Method for Capitalising Counterparty Credit Risk Exposures (June 2013), available at publ/bcbs254.htm, and The Standardised Approach for Measuring Counterparty Credit Risk Exposures (Mar. 2014), available at See Daniel K. Tarullo, Opening Statement at the April 8, 2014 Federal Reserve Open Board Meeting (Apr. 8, 2014), available at bcreg a-tarullo-statement.htm. See Transcript of Federal Reserve Open Board Meeting (Apr. 8, 2014) at 17, available at ( Transcript ). See, e.g., Daniel K. Tarullo, Evaluating Progress in Regulatory Reforms to Promote Financial Stability, Remarks at the Peterson Institute for International Economics (May 3, 2013), available at Janet L. Yellen, Regulatory Landscapes: A U.S. Perspective, Remarks at the International Monetary Conference, Shanghai, China (June 2, 2013), available at newsevents/speech/yellen a.htm; Jeremy C. Stein, Regulating Large Financial Institutions, Remarks at the Rethinking Macro Policy II conference sponsored by the International Monetary Fund, Washington, D.C. (Apr. 15, 2013), available at See Transcript, supra note 22, at 17. See id. at

13 ENDNOTES (CONTINUED) 26 The Agencies estimates were generated using December 2013 CCAR data, December Form FR Y-9C data and June 2013 Quantitative Impact Study data. -13-

14 ABOUT SULLIVAN & CROMWELL LLP Sullivan & Cromwell LLP is a global law firm that advises on major domestic and cross-border M&A, finance, corporate and real estate transactions, significant litigation and corporate investigations, and complex restructuring, regulatory, tax and estate planning matters. Founded in 1879, Sullivan & Cromwell LLP has more than 800 lawyers on four continents, with four offices in the United States, including its headquarters in New York, three offices in Europe, two in Australia and three in Asia. CONTACTING SULLIVAN & CROMWELL LLP This publication is provided by Sullivan & Cromwell LLP as a service to clients and colleagues. The information contained in this publication should not be construed as legal advice. Questions regarding the matters discussed in this publication may be directed to any of our lawyers listed below, or to any other Sullivan & Cromwell LLP lawyer with whom you have consulted in the past on similar matters. If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Stefanie S. Trilling ( ; trillings@sullcrom.com) in our New York office. CONTACTS New York Whitney A. Chatterjee chatterjeew@sullcrom.com H. Rodgin Cohen cohenhr@sullcrom.com Elizabeth T. Davy davye@sullcrom.com Mitchell S. Eitel eitelm@sullcrom.com Michael T. Escue escuem@sullcrom.com Jared M. Fishman fishmanj@sullcrom.com C. Andrew Gerlach gerlacha@sullcrom.com Andrew R. Gladin gladina@sullcrom.com Wendy M. Goldberg goldbergw@sullcrom.com Erik D. Lindauer lindauere@sullcrom.com Jiang Liu liujia@sullcrom.com Mark J. Menting mentingm@sullcrom.com Camille L. Orme ormec@sullcrom.com Rebecca J. Simmons simmonsr@sullcrom.com Donald J. Toumey toumeyd@sullcrom.com Marc Trevino trevinom@sullcrom.com Janine C. Waldman waldmanj@sullcrom.com Mark J. Welshimer welshimerm@sullcrom.com Michael M. Wiseman wisemanm@sullcrom.com -14-

15 Washington, D.C. Eric J. Kadel Jr William F. Kroener III J. Virgil Mattingly Jennifer L. Sutton Andrea R. Tokheim Samuel R. Woodall III Los Angeles Patrick S. Brown Stanley F. Farrar London Mark J. Welshimer Tokyo Keiji Hatano SC1: