Regulators ease new bank rule on leverage to aid economy

Monday 13 January 2014 10.29
Mario Draghi  chairs the Group of Governors and Heads of Supervision of the Basel oversight committee
Mario Draghi chairs the Group of Governors and Heads of Supervision of the Basel oversight committee

Global banking regulators have agreed to ease the way a new rule, meant to rein in risky balance sheets from 2018, is compiled to try to avoid crimping financing for the world's economy. 

The decision yesterday was the latest sign of how regulators have become more willing to accommodate banks as the focus switches to helping economies recover.

The relief to lenders may, however, be temporary as the regulators signalled there is still no agreement on the final level of the new leverage ratio, which measures how much capital a bank must hold against its loans and other assets.

The ratio was initially set at 3% of capital but supervisors from the US, Britain and elsewhere are pushing for a higher proportion, a person familiar with the debate said. 

The ratio acts as a backstop to a lender's core risk-weighted capital requirements. A ratio of 3% means a bank must hold capital equivalent to 3% of its total assets.

The rule is part of the Basel III accord endorsed by world leaders in response to the 2007-09 financial crisis that left taxpayers rescuing undercapitalised lenders.

The rules have been drafted by the Basel Committee and its oversight body, the Group of Governors and Heads of Supervision (GHOS), chaired by European Central Bank President Mario Draghi, backed key changes to the leverage ratio last night.

"The final calibration, and any further adjustments to the definition, will be completed by 2017," the GHOS said in a statement after its meeting in Basel in Switzerland.

When banks tot up their assets, they can now include derivatives on a net rather than the much bigger gross basis so they do not have an incentive to ditch some types of assets, such as loans to companies, to avoid hitting the ratio's ceiling.

US banks will welcome the change because their accounting rules have allowed them to net derivatives, while European banks, whose accounting rules require gross positions, will be able to net and not be at a disadvantage to US rivals.

The GHOS has endorsed new criteria which all banks must meet if they are to net derivatives and repurchase agreements for leverage ratio calculations, irrespective of what accounting standards they follow.

This will also make it easier for investors to compare banks. Banks must start disclosing their leverage ratio from 2015, and comply with the Basel minimum ratio from January 2018.

US and UK regulators have come to favour the leverage ratio as a main tool for checking on bank risks rather than just a backstop, as they suspect lenders are gaming the risk weighting system used to determine core capital buffers.

US banks are being asked to have leverage ratios well above 3% and some lawmakers in Britain want a ratio of 4%or more.

The Bank of England's director for financial stability, Andrew Haldane, has called for a much simpler method for calculating how much capital banks must hold rather than relying on complex risk weightings.

The GHOS said yesterday that consideration for simpler capital rules will be a top priority in 2014 and 2015.

Leading banks want to show investors they can meet a 3% leverage ratio already but with US banks being told to go higher, regulators say their international peers will also come under pressure to match those levels.

The GHOS also revised another rule, known as the net stable funding ratio (NSFR) which seeks to ensure that banks have enough funding available for over one year, to avoid being overly dependent on shorter-term funding which could dry up in a market crisis, as in the 2007 credit crunch.

Banks had complained of potential "cliff effects" for lenders if they could not include funding with maturities of slightly less than a year in their NSFR calculations.

To get round this, the GHOS agreed to create two new "buckets" so that banks can get some recognition for maturities of up to six months, and a bit more for six to 12 months.

The changes are likely to ease the burden on deposit-funded banks but will be slightly tougher on investment banks who prefer short-term funding.

Keywords: banks, basel