A final rule that modifies certain regulatory capital standards was approved by federal bank regulatory agencies last week.
The final rule modifies certain leverage capital standards applicable to the largest and most systemically important banks. The rule is designed to reduce disincentives a bank may have to engage in lower-risk activities, such as intermediating in U.S. Treasury markets. The rule sets the standard for these banks based on each organization’s overall systemic risk.
The final rule is similar to a proposal issued in June by the federal regulatory agencies, which include the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board, and the Office of the Comptroller of the Currency.
However, there are some changes from the proposal for depository institution. Specifically, the final rule caps the enhanced supplementary leverage ratio standard at one percent, making the overall requirement for these institutions no more than four percent.
This treatment is intended to reflect differences in the capital requirements and systemic risk profile of the overall organization relative to its depository institution subsidiaries. Further, the rule would also help ensure that the leverage standard operates as a backstop to risk-based capital requirements for depository institutions, particularly during times of stress.
The agencies estimate that overall levels of capital that banks maintain will remain broadly unchanged as a result of this rule. Also, the rule will reduce tier 1 capital requirements for affected bank holding companies by less than two percent. While depository institution subsidiaries would see greater reductions, that capital generally would not be available for distribution to external shareholders due to capital restrictions at the holding company level.
The final rule will take effect on April 1, 2026. However, banks may elect to adopt the modified standards beginning January 1, 2026.
The Bank Policy Institute applauded the move, calling it overdue.
“It will improve market liquidity and banks’ capacity to intermediate in Treasury and other capital markets, especially during stress. This reform will leave banks exceedingly well capitalized, with the binding requirement no longer a risk-insensitive leverage ratio but rather risk-based requirements under the Basel regime, the GSIB surcharge and the Federal Reserve’s stress capital charge,” Greg Baer, BPI president and CEO, said.