Basel Committee eases banks' leverage ratio

13th Jan 2014 16:40

On Sunday, the Bank for International Settlements (BIS) lowered some of its requirements as regards the level of regulatory capital which lenders must hold, known as the 'leverage ratio.' That seems to have come in response - at least in part - to worries that too onerous regulations could excessively restrain economic growth. While the move elicited a positive reaction in the stockmarket not all observers were happy with the decision. The 'leverage ratio' sets a minimum of 3% of a bank's approximate total assets as the least amount of capital which must be set aside as a 'buffer' against unexpected shocks.However, the Basel committee's decision means that the way in which those total assets is estimated has now been reduced, such that the leverage ratio for large global banks is now about 0.2 percentage points lower, according to a regulatory source cited by the Financial Times. More specifically, the BIS revised its standard so as to allow a greater netting of derivatives and [repurchase] transactions and reduced the amount of capital required against off-balance sheet items from 100% to the standardised approach for credit risk, analyst Alberto Gallo at RBS wrote on Monday. This will reduce the additional capital requirements for some banks, particularly investment banks Deutsche Bank, Barclays, Credit Suisse and UBS, Gallo added. However, said analyst was critical of those new moves, indicating in a note to clients that they are "a bad move for financial stability in the medium term."His reasoning was that they make it easier for banks to game other types of regulatory capital levels such as the definition for core Tier-1 capital (CET1). That measure is calculated on the basis of banks' risk-weighted assets (RWA).RWAs, however, can be subject to varying definitions, allowing some institutions to 'optimise' their assets such that they can have RWAs of as low as 25% or even 30% of their real total assets and yet hold seemingly high - in his opinion - ratios of CET1 of 10%. Lastly, this RBS analyst pointed out how de-leveraging by banks has been slowing down, to a pace of around €10-€20bn/month instead of the approximately €300-400bn/month seen in early 2013. That runs counter to fears in some quarters that the European Central Bank's (ECB) upcoming stress tests and asset quality review (AQR) would lead to a worsening of that trend. Rather, he expected those measures to result in an increase in transparency in the sector and thus result in an improvement in conditions amongst banks from the Eurozone's periphery. AB