Global banks will have to start disclosing their leverage ratios in 2015 under regulatory proposals issued today by the Basel Committee onBanking Supervision.
The group of global banking regulators published its proposed framework for addressing banks’ leverage within the new Basel III regime today. The initiative comes in response to the financial crisis, as regulators noted “the build-up of excessive on-and-off balance sheet leverage in the banking system” was an underlying factor in that calamity
As a result, regulators are seeking to introduce a simple, transparent, non-risk based leverage ratio to supplement the risk-based capital requirements. “The leverage ratio was designed to serve as an important backstop to the risk-based capital measures by constraining the build-up of leverage in the banking system and providing an extra layer of protection against model risk and measurement error,” the committee says.
It notes that “a simple leverage ratio framework is critical and complementary to the risk-based capital framework and that a credible leverage ratio is one that ensures broad and adequate capture of both the on- and off-balance sheet leverage of banks.”
The consultation released today sets out a specific formulation for calculating the leverage ratio by banks subject to the Basel III framework, as well as a set of public disclosure requirements.
Regulators have been trying to refine their rules for the leverage ratio to take account of differing accounting regimes. And, the proposals issued today include revisions to various aspects of the leverage rules, including the treatment of derivatives and related collateral.
So far, banks are to have started reporting their leverage ratios to regulators, and the committee said today that they should start making public disclosure in January 2015. Any final adjustments to the definition and calibration of the leverage ratio will be made by 2017, they say, with final implementation due in January 2018.
“The Basel III leverage ratio is a transparent, non-risk based measure that is needed to complement the risk-based capital requirements: used together, the two measures should considerably strengthen the bank capital adequacy framework,” said Stefan Ingves, chairman of the Basel Committee and governor of Sveriges Riksbank.
“Importantly, while maintaining its attraction as a relatively simple measure, the formulation of the leverage ratio proposed by the Committee also achieves international consistency in exposure measurement. This ensures investors and other stakeholders will have a comparable measure of bank leverage, regardless of domestic accounting standards,” he added.
Comments on this consultation issued today are due by September 20.