Statement by Martin J. Gruenberg
Member, Board of Directors, FDIC
Revisions to the Supplementary Leverage Ratio Capital Rule for Custody Banks
March 29, 2019
The notice of proposed rulemaking (NPR) under consideration by the FDIC
Board today would implement Section 402 of the Economic Growth, Regulatory
Relief and Consumer Protection Act (EGRRCPA). Section 402 directs the
appropriate Federal banking agencies to amend their rules for custodial banks to
exclude certain assets from the supplementary leverage capital ratio:
“Funds of a custodial bank that are deposited with a central bank shall not be
taken into account when calculating the supplementary leverage ratio as
applied to the custodial bank.”
Section 402 defines the term “custodial bank” as “any depository institution
holding company predominantly engaged in custody, safekeeping, and asset
servicing activities, including any insured depository institution subsidiary of such
a holding company.”
Under the proposed rule, a depository institution holding company would be
considered “predominantly engaged” under the terms of the statute if the U.S. top-
tier depository institution holding company has a ratio of assets under custody-to-
total assets of at least 30 to 1. As the preamble to the NPR points out, this proposed
standard demonstrates a clear separation between the three well-known U.S.
custody banks – Bank of New York Mellon, State Street Corporation, and
Northern Trust Corporation – and other banking organizations that might have a
large absolute dollar volume of custody assets but for which such assets are a much
smaller proportion of their total assets and thus could not reasonably be considered
as “predominantly engaged” in such activities.
The proposed rule’s implementation of the statute appears to be consistent
with the clear language of the law. For this reason, I will vote to approve this
proposed rule.
Member, Board of Directors, FDIC
Revisions to the Supplementary Leverage Ratio Capital Rule for Custody Banks
March 29, 2019
The notice of proposed rulemaking (NPR) under consideration by the FDIC
Board today would implement Section 402 of the Economic Growth, Regulatory
Relief and Consumer Protection Act (EGRRCPA). Section 402 directs the
appropriate Federal banking agencies to amend their rules for custodial banks to
exclude certain assets from the supplementary leverage capital ratio:
“Funds of a custodial bank that are deposited with a central bank shall not be
taken into account when calculating the supplementary leverage ratio as
applied to the custodial bank.”
Section 402 defines the term “custodial bank” as “any depository institution
holding company predominantly engaged in custody, safekeeping, and asset
servicing activities, including any insured depository institution subsidiary of such
a holding company.”
Under the proposed rule, a depository institution holding company would be
considered “predominantly engaged” under the terms of the statute if the U.S. top-
tier depository institution holding company has a ratio of assets under custody-to-
total assets of at least 30 to 1. As the preamble to the NPR points out, this proposed
standard demonstrates a clear separation between the three well-known U.S.
custody banks – Bank of New York Mellon, State Street Corporation, and
Northern Trust Corporation – and other banking organizations that might have a
large absolute dollar volume of custody assets but for which such assets are a much
smaller proportion of their total assets and thus could not reasonably be considered
as “predominantly engaged” in such activities.
The proposed rule’s implementation of the statute appears to be consistent
with the clear language of the law. For this reason, I will vote to approve this
proposed rule.
Prior to the enactment of EGRRPCA, I expressed strong reservations about
this provision because it would substantially reduce capital requirements for at
least two of the largest, most systemically important banking organizations in the
United States. That is still the case, and I would like to take this opportunity to
reiterate those reservations.
Funds deposited with a central bank have long been included in leverage
ratio requirements in the United States. Making this change to the supplementary
leverage ratio for custodial banks, which service and manage trillions of dollars of
assets on behalf of clients, would greatly reduce their capital requirements. As is
pointed out in the preamble to the proposed rule, this provision could result in an
estimated $7 billion, or roughly 23 percent, reduction in the tier 1 capital
requirements for the insured depository institutions of State Street Corporation and
Bank of New York Mellon, two of the eight U.S. global systemically important
banks (GSIBs).
State Street Corporation and Bank of New York Mellon have been identified
as GSIBs and are subject to higher capital requirements in large part because they
serve as counterparties to virtually every major financial market participant. The
financial services and products provided by these global custody banks are an
essential part of the financial markets’ infrastructure, and are not easily substituted
by other market participants should these firms be subject to material financial
distress.
Strengthening the leverage capital requirement of the largest, most
systemically important banks was an essential post-crisis reform that promotes
market confidence in times of stress and reduces the likelihood of failure. The
leverage capital ratio provides a simple and transparent constraint on financial
leverage that is a critically important complement to the more complex risk-based
capital requirement. Because of the inherent difficulty of measuring risks in
banking exposures, risk-based capital rules can permit institutions to operate with
capital cushions that do not provide confidence to counterparties in times of stress.
Both custodial banks, as well as the other U.S. GSIBs, meet the
supplementary leverage capital requirements today and remain quite profitable. It
is important to remember that the two custodial banks, like their GSIB peers,
this provision because it would substantially reduce capital requirements for at
least two of the largest, most systemically important banking organizations in the
United States. That is still the case, and I would like to take this opportunity to
reiterate those reservations.
Funds deposited with a central bank have long been included in leverage
ratio requirements in the United States. Making this change to the supplementary
leverage ratio for custodial banks, which service and manage trillions of dollars of
assets on behalf of clients, would greatly reduce their capital requirements. As is
pointed out in the preamble to the proposed rule, this provision could result in an
estimated $7 billion, or roughly 23 percent, reduction in the tier 1 capital
requirements for the insured depository institutions of State Street Corporation and
Bank of New York Mellon, two of the eight U.S. global systemically important
banks (GSIBs).
State Street Corporation and Bank of New York Mellon have been identified
as GSIBs and are subject to higher capital requirements in large part because they
serve as counterparties to virtually every major financial market participant. The
financial services and products provided by these global custody banks are an
essential part of the financial markets’ infrastructure, and are not easily substituted
by other market participants should these firms be subject to material financial
distress.
Strengthening the leverage capital requirement of the largest, most
systemically important banks was an essential post-crisis reform that promotes
market confidence in times of stress and reduces the likelihood of failure. The
leverage capital ratio provides a simple and transparent constraint on financial
leverage that is a critically important complement to the more complex risk-based
capital requirement. Because of the inherent difficulty of measuring risks in
banking exposures, risk-based capital rules can permit institutions to operate with
capital cushions that do not provide confidence to counterparties in times of stress.
Both custodial banks, as well as the other U.S. GSIBs, meet the
supplementary leverage capital requirements today and remain quite profitable. It
is important to remember that the two custodial banks, like their GSIB peers,