Proposed Changes to Basel III Leverage Ratio Framework

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2013-07-29

Summary:

Editor's Note: Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. The following post is based on the introduction to a Davis Polk client memorandum by Luigi L. De Ghenghi and Andrew S. Fei; the full publication, including visuals, tables, timelines and formulas, is available here.

On the heels of publishing the U.S. Basel III final rule, the U.S. banking agencies have proposed higher leverage capital requirements for the eight U.S. bank holding companies that have been identified as global systemically important banks (“Covered BHCs”) and their insured depository institution (“IDI”) subsidiaries. The higher leverage capital requirements, which we are calling the American Add-on, build upon the minimum Basel III supplementary leverage ratio in the U.S. Basel III final rule.

The proposed American Add-on would require a Covered BHC’s IDI subsidiaries to maintain a Basel III supplementary leverage ratio of at least 6% to be considered well-capitalized under the prompt corrective action framework. The American Add-on also requires Covered BHCs to maintain a leverage buffer that would function in a similar way to the capital conservation buffer in the U.S. Basel III final rule. A Covered BHC that does not maintain a Basel III supplementary leverage ratio of greater than 5%, i.e., a buffer of more than 2% on top of the 3% minimum, would be subject to increasingly stringent restrictions on its ability to make capital distributions and discretionary bonus payments. The proposed effective date of the American Add-on is January 1, 2018.

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Link:

http://blogs.law.harvard.edu/corpgov/2013/07/29/proposed-changes-to-basel-iii-leverage-ratio-framework/

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practitioner publications banking & financial institutions financial regulation banks international corporate governance & regulation basel committee financial institutions davis polk margaret tahyar international governance capital requirements andrew fei luigi de ghenghi leverage

Authors:

Margaret E. Tahyar, Davis Polk & Wardwell LLP,

Date tagged:

07/29/2013, 10:20

Date published:

07/29/2013, 09:12