Opening Statement of
FDIC Director Jeremiah O. Norton:
Basel III and Enhanced Supplementary
Leverage Ratio Final Rules
And
Notice of Proposed Rulemaking
To
Implement Basel Committee Revisions
To the
Denominator Measure for the Supplementary
Leverage Ratio
April 8, 2014
Mr. Chairman, I would like to begin by thanking today's presenters and their staff, who
have played an important role in working to modernize the capital framework for
banking organizations in the U.S. for many years.
I support each of the capital initiatives before the Board today: (1) the Final Rule
comprising the implementation of the Basel III accords in the U.S., (2) the Final Rule
setting forth an enhanced supplementary leverage ratio requirement for the largest bank
holding companies and their depository institution subsidiaries, and (3) a Notice of
Proposed Rulemaking to Implement Basel Committee Revisions to the Denominator
Measure for the Supplementary Leverage Ratio.
Today's measures represent an important step toward a more resilient U.S. banking
system. In particular, I will focus on the final rule setting forth an enhanced
supplementary leverage ratio requirement for the largest banking organizations in the
U.S.
Banking organizations in the U.S. have long been subject to a leverage ratio
requirement as part of the capital framework in the Federal Deposit Insurance Act.1
This leverage ratio requirement is calculated using only assets required to be reported
under U.S. Generally Accepted Accounting Principles (GAAP), which does not provide a
complete representation of an entity's financial position, particularly for larger banking
organizations engaged in extensive derivatives and securities financing activities. The
Agencies' July 2013 Basel III final and interim final rules place a 3 percent
supplementary leverage ratio requirement on advanced approaches banking
organizations. This new requirement relies on both GAAP-reportable assets as well as
certain categories of exposures and commitments that are not reportable under GAAP
and therefore provides a better measure of total leverage exposure.
Recent experience and data, however, support moving forward with a stronger
requirement than the 3 percent supplementary leverage ratio as a means to reduce the
likelihood of distress at the largest banking organizations and to lessen the effects of
such distress on the U.S. economy.
FDIC Director Jeremiah O. Norton:
Basel III and Enhanced Supplementary
Leverage Ratio Final Rules
And
Notice of Proposed Rulemaking
To
Implement Basel Committee Revisions
To the
Denominator Measure for the Supplementary
Leverage Ratio
April 8, 2014
Mr. Chairman, I would like to begin by thanking today's presenters and their staff, who
have played an important role in working to modernize the capital framework for
banking organizations in the U.S. for many years.
I support each of the capital initiatives before the Board today: (1) the Final Rule
comprising the implementation of the Basel III accords in the U.S., (2) the Final Rule
setting forth an enhanced supplementary leverage ratio requirement for the largest bank
holding companies and their depository institution subsidiaries, and (3) a Notice of
Proposed Rulemaking to Implement Basel Committee Revisions to the Denominator
Measure for the Supplementary Leverage Ratio.
Today's measures represent an important step toward a more resilient U.S. banking
system. In particular, I will focus on the final rule setting forth an enhanced
supplementary leverage ratio requirement for the largest banking organizations in the
U.S.
Banking organizations in the U.S. have long been subject to a leverage ratio
requirement as part of the capital framework in the Federal Deposit Insurance Act.1
This leverage ratio requirement is calculated using only assets required to be reported
under U.S. Generally Accepted Accounting Principles (GAAP), which does not provide a
complete representation of an entity's financial position, particularly for larger banking
organizations engaged in extensive derivatives and securities financing activities. The
Agencies' July 2013 Basel III final and interim final rules place a 3 percent
supplementary leverage ratio requirement on advanced approaches banking
organizations. This new requirement relies on both GAAP-reportable assets as well as
certain categories of exposures and commitments that are not reportable under GAAP
and therefore provides a better measure of total leverage exposure.
Recent experience and data, however, support moving forward with a stronger
requirement than the 3 percent supplementary leverage ratio as a means to reduce the
likelihood of distress at the largest banking organizations and to lessen the effects of
such distress on the U.S. economy.
First, as the Agencies noted last July, "[a]n estimated half of the covered BHCs
that were BHCs in 2006 would have met or exceeded a 3 percent minimum
supplementary leverage ratio at the end of 2006, and the other half were quite
close to the minimum. This suggests that the minimum requirement would not
have placed a significant constraint on the pre-crisis buildup of leverage at the
largest institutions."2 These data suggest that a more robust leverage ratio
requirement for the very largest banking organizations is warranted.
Second, there is recent economic research to support the conclusion that the
leverage ratio is a statistically significant predictor of bank default while the Basel
Tier 1 risk-based capital ratio is not.3 Research from the Bank of England on a
sample of 45 global banks shows that the leverage ratio is a statistically
significant predictor of bank failure, while Tier 1 risk-based capital ratios are not.
Likewise OECD economists, studying 94 banks between 2004 and 2011, have
shown that the Basel Tier 1 risk-based capital ratio is not a statistically significant
indicator of bank default; however, the leverage ratio is very statistically
significant.4
Third, research by the staff of the International Monetary Fund shows that a
leverage ratio anchored in tangible common equity had a statistically significant
impact on the degree to which banks reduced lending during the crisis, while
regulatory capital ratios did not.5 In other words, banks with higher leverage
ratios maintained the supply of credit more than their peers.
Finalizing a strengthened leverage ratio rule for the very largest banking organizations
at 5 percent for bank holding companies and 6 percent for depository institution
subsidiaries is an important step towards improving the resiliency of the banking
system. As I have noted in prior remarks, however, the risk-based capital framework
negotiated by the Basel Committee leaves unchanged measures that were proven
deficient during the financial crisis, such as the risk-weights on mortgages and
government-sponsored enterprises, and also fails to address appropriately foreign
sovereign debt risk-weights.6 These and other deficiencies underscore the need for the
U.S. banking system to have a meaningful leverage ratio requirement and for
policymakers to continue to improve the capital framework going forward.
I look forward to receiving comments on the Supplementary Leverage Ratio
Denominator NPR. Thank you.
1 See, e.g., 12 U.S.C. § 1831o(c); 12 C.F.R. § 325.3.
2 Board of Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, and Office of the Comptroller of the Currency, Regulatory Capital Rules:
Regulatory Capital, Enhanced Supplementary Leverage Ratio Standards for Certain
Bank Holding Companies and Their Subsidiary Insured Depository Institutions (Notice
of Proposed Rulemaking) 78 FR 51101, 51105 (August 20, 2013).
that were BHCs in 2006 would have met or exceeded a 3 percent minimum
supplementary leverage ratio at the end of 2006, and the other half were quite
close to the minimum. This suggests that the minimum requirement would not
have placed a significant constraint on the pre-crisis buildup of leverage at the
largest institutions."2 These data suggest that a more robust leverage ratio
requirement for the very largest banking organizations is warranted.
Second, there is recent economic research to support the conclusion that the
leverage ratio is a statistically significant predictor of bank default while the Basel
Tier 1 risk-based capital ratio is not.3 Research from the Bank of England on a
sample of 45 global banks shows that the leverage ratio is a statistically
significant predictor of bank failure, while Tier 1 risk-based capital ratios are not.
Likewise OECD economists, studying 94 banks between 2004 and 2011, have
shown that the Basel Tier 1 risk-based capital ratio is not a statistically significant
indicator of bank default; however, the leverage ratio is very statistically
significant.4
Third, research by the staff of the International Monetary Fund shows that a
leverage ratio anchored in tangible common equity had a statistically significant
impact on the degree to which banks reduced lending during the crisis, while
regulatory capital ratios did not.5 In other words, banks with higher leverage
ratios maintained the supply of credit more than their peers.
Finalizing a strengthened leverage ratio rule for the very largest banking organizations
at 5 percent for bank holding companies and 6 percent for depository institution
subsidiaries is an important step towards improving the resiliency of the banking
system. As I have noted in prior remarks, however, the risk-based capital framework
negotiated by the Basel Committee leaves unchanged measures that were proven
deficient during the financial crisis, such as the risk-weights on mortgages and
government-sponsored enterprises, and also fails to address appropriately foreign
sovereign debt risk-weights.6 These and other deficiencies underscore the need for the
U.S. banking system to have a meaningful leverage ratio requirement and for
policymakers to continue to improve the capital framework going forward.
I look forward to receiving comments on the Supplementary Leverage Ratio
Denominator NPR. Thank you.
1 See, e.g., 12 U.S.C. § 1831o(c); 12 C.F.R. § 325.3.
2 Board of Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, and Office of the Comptroller of the Currency, Regulatory Capital Rules:
Regulatory Capital, Enhanced Supplementary Leverage Ratio Standards for Certain
Bank Holding Companies and Their Subsidiary Insured Depository Institutions (Notice
of Proposed Rulemaking) 78 FR 51101, 51105 (August 20, 2013).