Less burdensome leverage ratio requirements among package of banking reforms announced by Basel Committee

Out-Law News | 14 Jan 2014 | 12:27 pm | 2 min. read

Large banks will not have to hold as much capital to cover the risks of certain off-balance sheet assets, global regulators have confirmed.

The Group of Governors and Heads of Supervision (GHOS) has now endorsed the Basel Committee on Banking Supervision's final definition of the standardised 'leverage ratio' for banks. The standard, which will enable banks to disclose capital held as a proportion of their total assets without weighting for risk, was published alongside a number of policy papers and announcements relating to the international banking agreement known as Basel III.

The finalised rules do not require banks to count 100% of their off-balance sheet assets including guarantees, letters of credit and most of their derivatives exposures, when calculating the ratio. They will also have more leeway to use the 'net' rather than gross value of securities financing transactions, including repurchasing agreements or repos, in their calculations. The changes have been introduced after "carefully considering comments received" in response to a June 2013 consultation exercise, the GHOS said.

The GHOS said that the ratio was an "important backstop" to the new risk-based capital reporting requirements, which came into force for EU banks from 1 January. The final leverage ratio has not been confirmed, but is currently set at 3% with "final calibration" due to be completed by 2017. Banks will be required to disclose how well they meet the rule from 2015, before the measure becomes binding in 2018. In the UK, the requirement came into force for the country's largest banks on 1 January.

The Basel III agreement introduces new baseline requirements for capital, leverage and liquidity. It will require banks to increase both the quantity and quality of capital they hold, while accounting for higher levels of risk-weighted assets. The GHOS, which oversees this work and of the Basel Committee, is made up of central bankers from 27 countries and chaired by European Central Bank president Mario Draghi.

"The finalisation of an internationally consistent measure of bank leverage is a significant step towards the full implementation of Basel III," Draghi said. "The leverage ratio is an important backstop to the risk-based capital regime and, when coupled with the [Liquidity Capital Ratio] and [Net Stable Funding Ratio], provides a regulatory framework that should help to ensure that banks are much more resilient to financial shocks than was the case in the past."

The changes will reduce the size of banks' balance sheets for the purposes of calculating the ratio, while still making it an effective measure of comparison. They include allowing banks to use the net value of some securities traded with the same counterparty, as long as "specific conditions" are met. They will also reduce the extent to which certain off-balance sheet exposures should be brought back onto the bank's balance sheet, and allow margins associated with certain derivatives exposures to be counted in the bank's favour in certain circumstances.

Other announcements include changes to the liquidity coverage ratio (LCR), which will give banks more flexibility to use committed liquidity facilities from central banks to meet the requirements. National supervisors will be able to choose whether or not to allow these facilities to count towards the LCR, and central banks will be able to offer these facilities at their discretion. The LCR provides that banks must hold enough high quality liquid assets (HQLA) to meet their liquidity needs over a 30 day period, and is scheduled to take effect next year.

The GHOS has also endorsed changes proposed by the Basel Committee to the Net Stable Funding Ratio (NSFR), which is the third phase of the Basel III reforms and is intended to ensure that banks have access to longer-term funding which is less likely to dry up in a market crisis. The Basel Committee will now consult on its proposals until 11 April. The NSFR is intended to take effect in 2018.