Fed gives largest US banks extra year for debt rule calculation

NEW YORK (Reuters) –The Federal Reserve said on Wednesday that bigger US banks would have an extra year to calculate a capital requirement known as the supplementary leverage ratio for stress testing.

Institutions subjected to the leverage ratio requirement will have to show regulators what the ratio would be in a stressed scenario beginning in 2017.

The extension applies to banks with more than $50 billion of assets, of which there were 39 at the end of the third quarter, according to data from the Federal Deposit Insurance Corp.

The supplementary leverage ratio creates hard limits on how much debt banks can borrow relative to their assets, without giving banks credit for having relatively low-risk assets.

Analysts have said that the supplementary leverage ratio is creating distortions in a number of corners of the bond market, including interestrate swaps and repo funding markets, by essentially making it more expensive for banks to fund positions in those markets.

Gennadiy Goldberg, US rates strategist at TD Securities, said the delay is unlikely to have much of an impact on credit markets as banks typically look to comply with capital rules well ahead of their actually kicking in.

According to an explanation the Federal Reserve released in conjunction with the rule, the extension was made to “allow banking organizations time to develop the systems necessary to project the supplementary leverage ratio under stressed conditions.”

The change was one of several the Fed made to its rules for stress testing banks and assessing their readiness for dividend hikes and share buybacks. Many of the changes relate to the timing of compliance with certain requirements, though the Fed also removed a requirement for banks to make a calculation known as the Tier 1 common ratio.