OFR_2016_Financial-Stability-Report

Figure 66. Five-Year Changes to G-SIB Composite Equity Capital Ratio
(percent)
Growth in G-SIB equity capital ratios has been driven by retained earnings
20
16
12
8
4
0
-4
Composite equity capital ratio
Positive impact on equity capital ratio
Negative impact on equity capital ratio
15.88
2010 equity
capital ratio
- 2.26
Impact of
changes to
risk-weighted
assets
0.15
Impact of
net stock
issuance
4.31
Impact of
retained
earnings
- 0.42
Impact of
other
adjustments
to capital
17.66
2015 equity
capital ratio
Note: Annual data from 2011 to 2015. G-SIB stands for global systemically important
bank.
Sources: Federal Reserve Form Y-9C, OFR analysis
G-SIBs already meet these
buffer requirements (see Heltman,
2016). However, it is not yet clear
how the new buffers will fit into
CCAR. G-SIBs may need to boost
capital if they have to keep these
higher levels under stress. This need
may be more difficult in the current
earnings environment, because
retained earnings account for much
of the improvement in G-SIBs’ regulatory
capital post-crisis (see Figure
66). For some G-SIBs, raising new
equity could also prove difficult.
In 2012, regulators introduced
the supplementary leverage ratio,
an additional minimum for banks
with assets greater than $250 billion
or with $10 billion or more
in foreign exposures. A minimum
ratio of 3 percent was set for all
banks meeting this criteria, with an
additional 2 percent buffer added
for banks with more than $700 billion
in assets or $10 trillion in assets
under custody. The supplementary ratio includes off-balance-sheet items
that weren’t part of the pre-crisis U.S. leverage ratio. All U.S. banks must
maintain a leverage ratio minimum of 4 percent of on-balance-sheet assets.
The leverage ratios are meant to complement risk-based capital requirements,
which can potentially be subject to misspecification or model risk.
Although simpler than risk-based capital requirements, a possible downside
of the leverage ratio is encouraging banks to take risks. In a recent working
paper, OFR researchers found an increase in some risk-taking after the introduction
of the supplementary leverage ratio. Bank holding companies’ broker-dealer
affiliates decreased overall repo borrowing but increased their use
of repo backed by more price-volatile collateral (see Allahrakha, Cetina, and
Munyan, 2016). This change in repo activity may have implications for these
firms’ short-term funding risk. Other researchers have similarly found that
a more binding leverage ratio may encourage the broker affiliates of bank
holding companies to raise their risk profiles (see Kiema and Jokivuolle,
2014). Although higher capital requirements could be assumed to reduce the
risk of failure, some research suggests regulatory capital measures have been
poor predictors of bank failure (see Bulow and Klemperer, 2013).
74 2016 | OFR Financial Stability Report