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By Jay Johnson, Director, Financial & Process Audit, BBVA Compass
What changes to supplementary leverage ratio have you seen, and what effect does this have on financial institutions?
Currently, the supplementary leverage ratio (SLR) has reverted back to the original (Basel) definition which was adopted by US regulatory agencies in 2014. During the pandemic, the regulatory agencies temporarily adjusted the SLR to exclude US Treasuries and deposits at the Federal Reserve to ease strains in the Treasury market.
There are several complex interactions that occurred when the extension ended, but these were more impactful for the US Treasury market than for financial institutions as a whole. Data indicates that the industry as a whole remained above regulatory minimums throughout the crisis, even without the adjustment. However, some of the weaknesses of the SLR as a capital ratio were exposed during the pandemic as balance sheets expanded due to rising deposits. Ultimately, while banks have been able to weather the short term impact, some of the potential consequences that could have occurred during the pandemic had the SLR not been altered are counterintuitive, and suggest that the SLR should be re-evaluated.
