Global custodians provided capital relief by Dodd Frank amendment

The provision exempts cash placed in central bank reserves by custodians from the calculation of the supplementary leverage ratio.

By Joe Parsons

BNY Mellon, Northern Trust and State Street have been granted relief over certain capital requirements due to a recent amendment to the Dodd Frank act.

President Donald Trump signed into law an amendment to the post-financial crisis regulation that would provide capital relief to smaller banks with less than $250 billion in assets.

It also included a provision exempting cash placed in central bank reserves from the calculation of the supplementary leverage ratio (SLR), a significant relief to custody banks.

“Trust and custody banks would benefit from the potential carve out of central bank deposits to their supplementary leverage ratios, allowing for increased leverage,” said Fitch Ratings in a recent article.

The ruling signals for the first time how policy makers have identified the difference in business models between custody banks and the other global systemically important banks (G-SIBs), according to one market commentator.

However, the amendment has excluded JP Morgan and Citi, the third and fourth largest global custodian by assets, due to the fact their investment bank is part of their primary business.

JP Morgan has lobbied US policy makers to include themselves and Citi into the exemption, given they also take deposits from other banks and hold them at the Federal Reserve.

The Federal Deposit Insurance Corporation (FDIC) calculated in an internal report had JP Morgan would be included in the exemption, its SLR capital requirement would be reduced by $21.4 billion.

Meanwhile the FDIC estimated BNY Mellon’s capital requirement would be $4.3 billion lower and State Street $3.2 billion lower.

The SLR was particularly challenging for custody banks due to size of cash assets they have on their balance sheets. The rules, unchanged, could potentially have discouraged global custodians from accepting further cash assets from their clients due to the increased costs.