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Supplementary Leverage Ratio (SLR) Terms To Be Reconsidered

The proposed move to reconsider Supplementary Leverage Ratio (SLR) would largely benefit large banks, points out Rafferty Capital Markets, LLC.

Richard X. Bove of Rafferty notes that the proposal would facilitate banks that qualify under SLR without being forced to shrink their balance sheets.

Cash is not a risky asset

Referring to press reports, Bove notes that Mr. Thomas Hoeing, vice-chairman of the FDIC is beginning to reconsider the terms of the Supplementary Leverage Ratio. The analyst points out Mr. Hoeing is willing to consider the fact that cash is not a risky asset.

The analyst believes that in case cash is not considered a risky asset, it would be a big decision and offer substantial benefits to large banks. For instance, three large trust banks such as The Bank of New York Mellon Corporation (NYSE:BK), State Street Corporation (NYSE:STT) and Northern Trust Corporation (NASDAQ:NTRS) would be greatly benefited. Further, it will also be very helpful to JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C) and Bank of America Corp (NYSE:BAC).

More importantly, the analyst points out that all of these banks would now probably qualify under the SLR without being forced to shrink their balance sheets or change their business models if cash were removed from the calculation.

The analyst recalls Mr. Hoeing’s earlier incorrect views on terming U.S. Treasuries as a risky asset.

Delay in SLR

As reported earlier, Citi analyst Josh Levin pointed out that the final rule for the SLR has probably been pushed back to the beginning of next year because regulatory bodies are devoting most of their remaining resources to dealing with the potential fallout from the debt ceiling crisis.

The Citi analyst believes the FDIC is in favor of the SLR while other regulators are pushing for a risk-based capital approach. The analyst point out this would imply the SLR would apply to banks, but may not be used in stress tests.

SLR vs. risk-weighted assets

Richard X. Bove of Rafferty points out that the Basel III requires banks to place a bureaucrat-determined risk-weighting on each of their assets. The analyst notes the result is that rather than considering all bank assets as the basis for determining the bank’s capital ratio, the risk-weighted assets are used.

Bove believes SLR supporters want total assets to be considered as the basis of determining capital ratios as they believe that cash, U.S. Treasury securities and other cash-like assets such as repos are risky assets. Hence, the SLR supporters have promulgated a rule which uses total assets and not just risk weighted assets as the basis of determining capital ratios.

Interestingly, Rafferty analyst points out SLR supporters have even sought SLR ratios for U.S. banks that are higher than those mandated by other countries. Citing Bloomberg report, the analyst points out Mr. Hoeing may not entertain a lower SLR for U.S. as envisaged for other countries.

To highlight the level of Cash component in the large banks’ assets, the Rafferty analyst believes the following table complied by SNL securities would come in handy: