On July 14, BPI filed a comment letter with the Fed, the OCC and the FDIC in response to the joint agency IFR regarding the supplementary leverage ratio (SLR) for depository institutions. The IFR permits a depository institution to elect to temporarily exclude U.S. Treasuries and deposits at Federal Reserve Banks from calculations of their SLR, however, any depository institution that makes this election must receive approval from its primary Federal banking regulator before paying dividends or making certain other capital distributions so long as the exclusion is in effect.
BPI expressed support for the agencies’ modifications to the SLR to allow banks to better serve their vital function as financial market intermediaries and support lending to U.S. households and businesses, especially during this critical time. However, we believe that the consequence of the dividend prior approval condition is that few banks will “opt-in” because of the resultant unpredictability of dividend capacity and the inability of the banks to plan and anticipate how opting in would affect their ability to pay dividends. The ultimate result will be largely to moot the IFR by failing to encourage bank lending and provide support for the broader economy that the agencies intended to produce.
Accordingly, BPI recommends the agencies should:
- Follow the unconditional approach of the Federal Reserve interim final rule and adopt the SLR modifications without the dividend prior approval condition;
- Consider other adjustments that would support the ability of banks to provide credit to the economy and function as financial market intermediaries, and revisit the calibration of all leverage ratios in the longer-term so that leverage ratios appropriately function as a backstop and not as a binding constraint; and
- Exclude repo-style transactions backed by Treasuries from the final rule to further support Treasury market functioning and banks’ roles as intermediaries to support the broader economy.