Out-Law News 2 min. read
09 Dec 2015, 3:19 pm
The regulator has confirmed that UK banks will be subject to a stricter method of calculating capital held as a percentage of on-balance sheet assets than is required under global rules. However, it will extend the transitional period for daily averaged disclosures from 12 months to 24 months, to end on 31 December 2017; in recognition of the difficulties banks will experience putting the necessary procedures in place.
"This would mean that there is a period where the daily averaged number is being reported to the PRA but not publicly disclosed, which would allow firms additional time to improve the accuracy and comparability of the averaged numbers without compromising the effective monitoring of the UK leverage ratio framework," the PRA said in response to its consultation, which was published in July.
"The PRA does not consider that representative disclosures can be achieved by relying solely on supervisory monitoring and bilateral agreements with individual firms. It sees considerable benefits in requiring the disclosure of an averaged leverage ratio as a means of promoting market discipline and in aligning the approach to UK leverage ratio disclosures with those required of US firms," it said.
The regulator said that it recognised that its stricter approach would have "cost implications" for firms, which would be required to "[develop] systems and processes to report and disclose the averaged leverage ratio". However, these costs would not be "disproportionate to the size and systemic importance of the firms in scope", it said.
In addition, individual firms would be able to apply for a rule modification if the application of the new rules to their business met the statutory test of being unduly burdensome or not achieving the purpose for which the rules were made, it said.
The leverage ratio refers to the minimum level of capital banks have to hold as a proportion of their total assets without weighting for risk, and is one of the measures of bank capital reporting required of global banks under the Basel III international regulatory regime. Global requirements are expected to come into force in 2018. Because it is a more straightforward calculation, the leverage ratio is considered less vulnerable to manipulation than traditional measures of the loans and other assets on banks' balance sheets, such as capital or leverage ratios.
The PRA's leverage ratio requirements will come into force on 1 January 2016, subject to transitional provisions on reporting and disclosure. They will apply to all the banks and building societies that the PRA regulates which hold over £50 billion in retail deposits, either individually or as part of a consolidated group. Banks will be required to meet a minimum 3% leverage requirement under the PRA's framework, as well as two additional buffers depending on the size and complexity of the firm and the relative strength of the economy.
As announced in July, UK banks will ultimately be required to report daily averaged figures to avoid the temptation of "window dressing" around the reporting date. The term is used by regulators to refer to the practice of banks managing down the value of their balance sheets around the reporting date, with the effect that their published leverage ratio figures are more flattering than they otherwise would be.
Some firms told the PRA in response to the consultation that disclosing the averaged leverage ratio could lead to investors and market participants "misinterpreting balance sheet flexibility ... as structural weakness". The PRA said that it would be up to firms to "ensure that any differences between the averaged and end-quarter leverage ratios are clearly explained to facilitate understanding of their disclosures".